<PAGE>


                                      FORM 10-K
                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549


[X]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period  from January 1, 1996 to September 30, 1996
Commission file number: 1-7196

                           CASCADE NATURAL GAS CORPORATION

Washington                                  91-0599090
----------                                  ----------
State or other jurisdiction of              (I.R.S. Employer
incorporation or organization               Identification No.)

222 Fairview Avenue North                   (206) 624-3900
Seattle, WA 98109                           --------------
-----------------                           (Registrant's telephone number,
(Address of principal executive office)     including area code)

             Securities registered pursuant to Section 12(b) of the Act:

Title of  Each Class                  Name of each Exchange on which Registered
--------------------                  -----------------------------------------

Common Stock, Par Value $1 per Share        New York Stock Exchange
Preferred Stock Purchase Rights             New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:  None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  X  No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of the close of business on November 29, 1996, was $183,295,057

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

Title                                       Outstanding
Common Stock, Par Value $1 per Share        10,818,233 as of November 29, 1996

                         DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement for its 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III, Items 10,
11, 12, and 13.

<PAGE>

                           CASCADE NATURAL GAS CORPORATION
         ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K
                  For the Transition Period Ended September 30, 1996

                                  Table of Contents

                                                                     Page
Number                                                               ----
------

Part I
    Item  1 - Business                                                3
    Item  2 - Properties                                             12
    Item  3 - Legal Proceedings                                      12
    Item  4 - Submission of Matters to a Vote of Security Holders    12
    Executive Officers of the Registrant                             13

Part II
    Item  5 - Market for Registrant's Common Equity and
                   Related Stockholder Matters                       14
    Item  6 - Selected Financial Data                                15
    Item  7 - Management's Discussion and Analysis of Financial
                   Condition and Results of Operations               17
    Item  8 - Financial Statements and Supplementary Data            23
    Item  9 - Changes in and Disagreements With Accountants on
                   Accounting and Financial Disclosure               45

Part III
    Item 10 - Directors and Executive Officers of the Registrant     46
    Item 11 - Executive Compensation                                 46
    Item 12 - Security Ownership of Certain Beneficial Owners
                   and Management                                    46
    Item 13 - Certain Relationships and Related Transactions         46

Part IV
    Item 14 - Exhibits, Financial Statement Schedules and
                   Reports on Form 8-K                               47

Signatures                                                           48

Index to Exhibits                                                    49


                                          2

<PAGE>

                                        PART I

ITEM 1. BUSINESS.

GENERAL
    Cascade Natural Gas Corporation (Cascade or the Company) was incorporated
under the laws of the state of Washington on January 2, 1953.  Its principal
business is the distribution of natural gas to customers in the states of
Washington and Oregon.  Approximately 17% of its gas distribution revenues are
from the state of Oregon.

    At September 30, 1996, there were 127,794 residential customers, 23,827
commercial customers, 320 firm industrial customers and 23 traditional
interruptible customers, all of which are classified as core customers.  In
addition, there were 152 non-core customers.  In the twelve months ended
September 30, 1996, core customers provided 71% of the operating margin, while
consuming 23% of the total gas deliveries. In the twelve months ended September
30, 1995, core customers accounted for 69% of the operating margin, and 24% of
the total gas deliveries.   The non-core customers (including transportation
service) provided the remaining operating margin and throughput.

    Cascade's gas supply contracts provide for annual review of gas prices for
possible adjustment.  To the extent that prices are changed for core customers,
Cascade is able to pass the effect of such changes subject to regulatory review
to its customers by means of a periodic purchased gas cost adjustment (PGA) in
each state.  Gas price changes occurring between times when PGA rate changes
become effective are deferred for pass through in the next PGA.

    The Company is also subject to state regulation with respect to integrated
resource planning and has recently filed its updated 1996 Integrated Resource
Plan (IRP) with both the Washington Utilities and Transportation Commission
(WUTC) and the Oregon Public Utility Commission (OPUC).  The IRP shows the
Company's plan for the best set of supply and demand side resources that
minimizes costs and has acceptable levels of deliverability risk over the
twenty-year planning horizon.  The IRP also sets forth the Company's forecast of
growth in customers and volume throughput for a twenty-year period.  In
addition, the IRP sets forth the Company's demand side management goals of
achieving certain conservation levels in customer usage.  The Company's
investments in cost-effective demand side resources are recoverable in rates in
both Washington and Oregon.

    The IRP also sets forth the Company's supply side management plans
regarding transportation capacity and gas supply acquisition over a twenty-year
period.  The Company develops updates of the IRP every two years. These updated
documents take into account input solicited from the public and the WUTC and
OPUC staffs.  While the filing of the IRP with both commissions gives the
Company no advance assurance that its acquisitions of pipeline transportation
capacity and gas supplies will be recognized in rates, management believes that
the integrated resource planning process benefits the Company by giving it the
opportunity to obtain input from regulators and the public concurrently with
making these important strategic decisions.


                                          3

<PAGE>

    Until the Company receives final regulatory approval of these decisions in
the context of a general rate case, the Company cannot predict with certainty
the extent to which the integrated resource planning process will affect its
rates.

    The principal industrial activities in Cascade's service area include the
production of pulp, paper and converted paper products, plywood, chemical
fertilizers, industrial chemicals, cement, clay and ceramic products, textiles,
refining of crude oil, smelting and forming of aluminum, the processing and
canning of many types of vegetable, fruit and fish products, processing of milk
products, meat processing and the drying and curing of wood and agricultural
products.

NATURAL GAS SUPPLY

    The majority of Cascade's supply of natural gas is transported via
Northwest Pipeline Corporation (Northwest).  Northwest owns and operates a
transmission system extending from points of interconnection with El Paso
Natural Gas Company and Transwestern Pipeline Company near Blanco, New Mexico
through the states of New Mexico, Colorado, Utah, Wyoming, Idaho, Oregon and
Washington to the Canadian border near Sumas, Washington.  Natural Gas is
transported north from the Colorado and New Mexico area, and south from British
Columbia, Canada. The Company is also a shipper on the Pacific Gas Transmission
Company (PGT) system.  PGT owns and operates a gas transmission line that
connects with the gas fields in Alberta, Canada at the international border and
extends through Washington and central Oregon into California.

    Presently, baseload requirements for Cascade's core market group are
provided by six major gas supply contracts with various expiration dates from
1997 through 2008 and totaling 814,830 therms per day.  Approximately 82% of the
gas supplied pursuant to the contracts is from Canadian sources.  The remainder
is domestic.  These contracts are supplemented by various service agreements to
cover periods of peak demand including three storage agreements with Northwest.
One extends to October 31, 2014 and provides for 165,950 therms per day and a
maximum, renewable inventory of 5,973,780 therms.  The second, with The
Washington Water Power Company (WWP), has a primary term ending April 30, 1998,
and entitles Cascade to receive up to 150,000 therms per day and a maximum,
renewable inventory of 4,800,000 therms. A third contract for liquefied natural
gas ("LNG") storage is available through October 31, 2014.  Under this LNG
agreement, Cascade is entitled to receive up to 600,000 therms per day to a
maximum, renewable inventory of 5,622,000 therms.  In addition to withdrawal and
inventory capacity, Cascade also maintains a corresponding amount of firm
transportation from the storage facility to the city gate for each of these
agreements.

    In addition to underground and LNG storage, Cascade has entered into 
contracts with two of its major industrial customers whereby each customer 
agrees to switch to alternate fuel allowing Cascade to reduce firm deliveries 
to that customer.  One such peak shaving agreement entitles Cascade to call 
on 150,000 therms per day up to a seasonal total of 3,000,000 therms.  This 
contract expires on September 30, 2015.  The second peak shaving agreement, 
which expires on September 30, 2014, entitles Cascade to call on

                                          4

<PAGE>

a maximum of up to 500,000 therms per day and up to a seasonal total of 
3,000,000 therms.

    Commencing December 1995 Cascade entered into two peaking service
agreements with Canadian gas suppliers.  These agreements provide for a maximum
daily quantity of 300,000 therms on peak and renewable inventory of 6,750,000
therms.  Cascade can call upon these two service agreements any day during the
peak winter months of December, January and February.  These service agreements,
while less reliable than firm storage service, are more flexible than baseload
gas supply contracts. Both agreements allow for same day nomination and city
gate delivery at a competitive cost.  Each agreement has a primary term of three
years ending February 1998.

    Cascade maintains a diversified portfolio of natural gas supplies.  During
1996, Cascade purchased gas supplies approximately 86.3% from firm gas supply
contracts, and 13.7% from 30-day spot market contracts.  In addition,
606,743,000 therms of customer purchased supplies were transported across
Cascade facilities.

WASHINGTON RATE SETTLEMENT

    For a description of the final settlement, in July 1996, of three rate
applications filed by the Company, see "Regulatory Matters" under Item 7.

CURRENT FEDERAL ENERGY REGULATORY COMMISSION (FERC) MATTERS

    The FERC issued an order on December 20, 1994 confirming an earlier order
reallocating the direct billed gas supply take or pay contract restructuring
costs among Northwest Pipeline Corporation's (Northwest) customers. The FERC
order gave Cascade an obligation of $4.8 million, approximately $1.8 million
above the allocation method favored by the Company. Cascade joined with others
and appealed the order to the D. C. Circuit Court. It does not appear that the
previous order will be overturned, and Cascade is no longer taking an active
part in appealing the order. To the extent Cascade's final allocation differs
from the original, it will seek to pass on the difference to its customers.

    On August 1, 1995, Northwest filed a general Section 4 rate case (RP95-409)
with interim rates, subject to refund, effective February 1, 1996. This filing
asks for a cost of service of $270 million. Hearings have been completed on
RP95-409 and the case is awaiting briefing by the involved parties. Northwest
has since filed an additional rate case (RP96-367) with a requested cost of
service of $299.8 million. Interim rates, subject to refund, will be effective
on March 1, 1997. This case is currently in the discovery phase and will likely
go to hearing during 1997.

    On May 31, 1995 the FERC issued a Statement of Policy (PL94-4) for the rate
treatment of new and existing facilities constructed by interstate natural gas
pipelines. The policy concerns the question of whether to utilize a rolled in
methodology or an incremental rate design. According to the Statement of Policy,
the FERC will apply a presumption in favor of rolled in rates when the increase
to existing customers is 5% or less, and the pipeline makes a showing of system-
wide benefits. Pipelines not meeting the


                                          5

<PAGE>

5% test must show benefits proportionate to the rate impact for the presumption
of rolled in rates. Although not final, this ruling will have a major influence
in the rate methodology utilized in the current and future Northwest Pipeline
Corporation and Pacific Gas Transmission Company rate cases.

COST OF PURCHASED GAS

    Cascade's cost of gas depends primarily on the prices negotiated with
producers and brokers, coupled with the cost of interstate and Canadian pipeline
transportation service.

CURTAILMENT PROCEDURES

    In previous heating seasons, cold weather has required Cascade to
significantly curtail its interruptible customers.  Cascade has not curtailed
any firm customers, except under force majeure provisions.  Cascade's tariffs
effective in Washington and Oregon, allow for curtailment of interruptible
services, which are provided at rates lower than for firm services.  In the
event of curtailment by Cascade of firm service due to force majeure, Cascade's
tariffs provide that it shall not be liable for damages or otherwise to any
customer for failure to deliver gas curtailed in accordance with the provisions
of the tariffs.  The tariffs provide for appropriate adjustment of the monthly
bill of firm customers curtailed by reason of an insufficient supply of gas.

TERRITORY SERVED AND FRANCHISES

    The population of communities served by Cascade total approximately
744,000. Cascade has all the franchises necessary for the distribution of
natural gas in the communities it serves in Washington and Oregon.  Under the
laws of those states, incorporated municipalities and counties may grant
non-exclusive franchises for a fixed term of years conferring upon the grantee
certain rights with respect to public streets and highways in the location,
construction, operation, maintenance and removal of gas distribution facilities.

    In the opinion of Cascade's management, none of its franchises contain any
restrictions or requirements which are of a materially burdensome nature, and
such franchises are adequate for the conduct of Cascade's present business.
Franchises expire on various dates from 1997 to 2065.  Management has not
incurred significant difficulties in renewing franchises when they expire and
does not expect any significant problems in the future.

CUSTOMERS

    Residential and commercial customers principally use natural gas for space
heating and water heating.  This market is very weather-sensitive.  See
"Seasonality," below.

    Of its non-core customers, 15 accounted for approximately 16.5% of
Cascade's total operating revenues for the twelve months ended September 30,
1996.  Agreements


                                          6

<PAGE>

with its principal industrial customers are for fixed terms of not less than one
year and provide for automatic extension from year to year unless terminated by
either party on 30-days' notice.  See Note 12 under Notes to Consolidated
Financial Statements, for information regarding revenues from a major customer.

SEASONALITY

    Weather is an important factor affecting gas revenues because of the large
number of customers using gas for space heating.  For the twelve months ended
September 30, 1996, 67% of operating revenues and 105% of earnings from
operations were derived from the first two quarters (October 1995 through March
1996). Because of the seasonality of space heating revenues, Cascade believes
financial results for interim periods are not indicative of results to be
expected for the year.

COMPETITIVE CONDITIONS

    Cascade operates in a competitive market for natural gas service.  Cascade
competes with residual fuel oil and other alternative energy sources for
industrial boiler uses, and oil and electricity for residential and commercial
space heating, and electricity for water heating.

    Competition is primarily based on price.  For residential and commercial
space heating use, Cascade continues to maintain a price advantage over oil in
its entire service territory and has an advantage over electricity in the vast
majority of its territory.  In the remaining areas of its service territory
served by public electric utilities with their own hydro power supply, Cascade
is almost equal in cost with respect to electricity furnished by those utilities
for space heating and water heating uses.  Through its wholly-owned subsidiary,
Cascade Land Leasing Co., the Company provides loans to customers to finance the
purchase and installation of energy efficient gas appliances.

    Historically, the large volume industrial market was very sensitive to
price fluctuations between the comparable cost of natural gas and alternate
fuels, principally residual fuel oil used in boiler applications.  However, the
advent of open access transportation and the restructuring of gas supply and
contractual provisions with these customers has improved the Company's
competitive position.  From December 1991 through January 1992 and again from
December 1992 through May 1994, except for a brief period in June 1993, residual
fuel oil prices were lower than natural gas, but Cascade did not experience any
significant loss of sales to alternate fuels during those periods.

    In addition to multiple alternate fuels, the Company competes with other
sellers of natural gas because of the potential for bypass of the Company's
facilities.  Bypass refers to actual or prospective customers which install
their own facilities and connect directly to an upstream pipeline and thereby
"bypass" the distribution company's service.  The Company has experienced bypass
but has also experienced success in offering competitive rates to reduce
economic incentives to bypass.


                                          7

<PAGE>

    The Bonneville Power Administration ( BPA ) is a major supplier of
hydro-electric power in the Pacific Northwest including Cascade's service area.
BPA significantly influences the electric rates of all classes of customers
including those applications in direct competition with natural gas marketed by
Cascade.

ENVIRONMENTAL
    The Company is subject to federal and state environmental regulation of its
operations and properties through the United States Environmental Protection
Agency, the Washington Department of Ecology and the Oregon Department of
Environmental Quality.  Such regulation may, at times, result in the imposition
of liability or responsibility for the clean-up or treatment of existing
environmental problems or for the prevention of future environmental problems.

    In the early 1950's, the Company purchased several of the gas distribution
facilities that it operates today.  Among the acquired facilities, the Company
has identified to date twelve small manufactured gas plants which had used oil
or coal as feedstock to produce manufactured gas.  Some of the waste byproducts
of the manufacturing process contain hazardous substances which, if found in
sufficient concentrations, could pose environmental problems.

    Almost all of these plants were either dismantled or converted to propane
air prior to 1956.  In 1956, when natural gas became available, the remaining
plants were dismantled.  The  plant sites were cleaned up when the plants were
dismantled and the sites are currently being used for other purposes.
Environmental agencies have monitored three of the plant sites and have found no
hazardous substances at levels requiring remediation.

    During the first quarter of 1995, a claim related to environmental
contamination from a former manufactured gas plant site in Oregon previously
operated by a predecessor corporation of the Company was filed by the present
property owner. The claim requested that the Company assume responsibility for
investigation and possible cleanup of alleged contamination on the property. At
this date it appears that contamination is present at the site, but there is no
estimate of the extent of possible clean-up costs. To the extent the Company may
be responsible for any portion of such costs, it will seek contribution from
other responsible parties, recovery from its insurers and appropriate rate
relief. See Note 11 under Notes to Consolidated Financial Statements. Based on
information received to date, it is not aware of hazardous substances present at
any of the other plant sites at levels that would require remediation.

    The Company is in the process of remediating an area that was contaminated
by underground diesel and gasoline storage tanks.  See Note 11 under Notes to
Consolidated Financial Statements.

CAPITAL EXPENDITURES

    Capital expenditures for fiscal 1997 are budgeted at $32,000,000.
Including the 1997 budget, the Company will have spent over $165,000,000 in new
plant in the five


                                          8

<PAGE>

years ending in 1997, compared to $157,493,000 in the 12-year period from 1981
through 1992.  Construction of the line to serve the fifth cogeneration customer
on Cascade's system was completed in February 1996. The contracts for service to
the five cogeneration customers are expected to yield relatively level payments
over the 15 to 25 year contract lives.  The contracts provide for demand charges
as well as distribution charges which should recover the capital investment in
the facilities and provide a return to shareholders over their term.  With level
payments, projected annual rates of return are low in the early years and
increase significantly over time as the Company's investment is depreciated.

    The Company is currently forecasting that capital expenditures will total
approximately $150,000,000 over the next five years.

NON-UTILITY SUBSIDIARIES

    Cascade has four non-utility subsidiaries, only one of which is actively
engaged in business at present.  This subsidiary is engaged in the financing of
Cascade customers' purchases of energy-efficient appliances.  The subsidiaries,
which in the aggregate account for less than 5% of the consolidated assets of
the Company, do not currently have a significant impact on Cascade's financial
condition or the results of its operations.

PERSONNEL

    At September 30, 1996, Cascade had 472 employees.  Of the total employees,
220 are represented by the International Chemical Workers Union.  The present
contract with the union extends to April 1, 1999, and thereafter until
terminated by either party on sixty days notice.


                                          9

<PAGE>

 
<TABLE>
<CAPTION>

OPERATING STATISTICS
 (UNAUDITED)
                                                                     12 MONTHS ENDED SEPTEMBER 30
                                                    1996           1995           1994           1993          1992
<S>                                              <C>              <C>            <C>            <C>           <C>
GAS DISTRIBUTION REVENUE (THOUSANDS OF DOLLARS)
    Firm
         Residential                                $62,076        $56,816        $47,011        $45,284       $34,940
         Commercial                                  55,971         54,289         46,730         46,057        37,184
         Industrial                                  11,378         13,090         11,716         10,262         8,545
    Interruptible
         Commercial                                   3,431          3,856          3,386          2,931         2,985
         Industrial                                   1,439          1,867          2,188          1,625         2,049
    Non-Core                                         33,628         47,907         70,858         67,927        56,407
                                                 ----------------------------------------------------------------------
         Total gas sales revenue                    167,923        177,825        181,889        174,086       142,110
    Transportation revenue                           16,454         10,353          6,884          6,367         5,923
                                                 ----------------------------------------------------------------------
         Total gas distribution revenue            $184,377       $188,178       $188,773       $180,453      $148,033
                                                 ----------------------------------------------------------------------
                                                 ----------------------------------------------------------------------
GAS DELIVERIES (THOUSANDS OF THERMS)
    Firm
         Residential                                101,779         93,524         83,912         86,284        66,388
         Commercial                                 103,433        101,145         95,695        101,057        82,000
         Industrial                                  24,210         27,678         27,808         26,635        22,387
    Interruptible
         Commercial                                   4,888          5,994          5,385          4,651         4,800
         Industrial                                   3,536          4,603          6,440          5,212         6,472
    Non-Core                                        194,986        258,605        297,225        264,658       271,512
                                                 ----------------------------------------------------------------------
         Total sales therms                         432,832        491,549        516,465        488,497       453,559
    Transportation deliveries                       606,743        471,657        329,840        206,801       142,901
                                                 ----------------------------------------------------------------------
         Total deliveries                         1,039,575        963,206        846,305        695,298       596,460
                                                 ----------------------------------------------------------------------
                                                 ----------------------------------------------------------------------

CUSTOMERS (MONTHLY AVERAGES)
    Firm
         Residential                                127,089        119,633        111,055        102,354        94,701
         Commercial                                  23,741         22,755         21,794         20,968        20,019
         Industrial                                     329            332            327            313           309
    Interruptible
         Commercial                                      11             17             17             17            17
         Industrial                                      14             14             14             14            17
    Non-Core                                            128             99             89             84            79
                                                 ----------------------------------------------------------------------
         Total                                      151,312        142,850        133,296        123,750       115,142
                                                 ----------------------------------------------------------------------
                                                 ----------------------------------------------------------------------
    Year-end totals                                 152,116        143,372        134,823        124,963       116,434
                                                 ----------------------------------------------------------------------
                                                 ----------------------------------------------------------------------


                                         10

<PAGE>

<CAPTION>

OPERATING STATISTICS (CONTINUED)
 (UNAUDITED)
                                                                     12 MONTHS ENDED SEPTEMBER 30
                                                   1996           1995           1994           1993          1992
<S>                                                 <C>            <C>            <C>            <C>           <C>
AVERAGE ANNUAL USE PER CUSTOMER (THERMS)
         Residential                                    801            782            756            843           701
         Commercial-firm                              4,357          4,445          4,391          4,820         4,096
AVERAGE ANNUAL REVENUE PER CUSTOMER
         Residential                                   $488           $475           $423           $442          $369
         Commercial-firm                             $2,358         $2,386         $2,144         $2,197        $1,857
AVERAGE RATE PER THERM
    Firm
         Residential                                $0.6099        $0.6075        $0.5603        $0.5248       $0.5263
         Commercial                                 $0.5411        $0.5367        $0.4883        $0.4558       $0.4535
         Industrial                                 $0.4700        $0.4729        $0.4213        $0.3853       $0.3817
    Interruptible
         Commercial (excluding facilities charges)  $0.4384        $0.4051        $0.3586        $0.3174       $0.3188
         Industrial                                 $0.4070        $0.4056        $0.3398        $0.3118       $0.3166
    Non-Core                                        $0.1725        $0.1853        $0.2384        $0.2567       $0.2078
    Transportation                                  $0.0271        $0.0220        $0.0209        $0.0308       $0.0414

AVERAGE COST PER THERM FOR GAS PURCHASED            $0.2262        $0.2309        $0.2647        $0.2312       $0.1990

HEATING DEGREE DAYS
    System average (30-year average - 5,675)          5,620          5,607          5,301          6,129         4,894

MAXIMUM DAY SEND OUT
     (1,000 therms) including transportation          4,863          3,955          3,341          3,134         2,504

AVERAGE DAILY SEND OUT
     (1,000 therms) including transportation          2,883          2,661          2,327          1,952         1,660

EMPLOYEES AT END OF YEAR                                472            471            473            465           463

</TABLE>

 

                                          11

<PAGE>

ITEM 2. PROPERTIES.

    At September 30, 1996, Cascade's utility plant investments included
approximately 3,952 miles of distribution mains ranging in diameter from two
inches to sixteen inches, 240 miles of transmission mains ranging in diameter
from two inches to sixteen inches and 2,508 miles of service lines.

    The distribution and transmission mains are located under public property
such as streets and highways or on private property with the permission or
consent of the individual owner.

    Cascade owns at present twenty two buildings used for operations, office
space and warehousing in Washington and eight such buildings in Oregon.  It
occupies an additional five commercial offices and maintains 34 pay stations in
communities throughout its operating territory.  Cascade considers its
properties well maintained and in good operating condition, and adequate for
Cascade's present and anticipated needs.  All facilities are substantially
utilized.



ITEM 3. LEGAL PROCEEDINGS.


    See Item 1, Business, under "Environmental".

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    None.


                                          12

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

    The Executive Officers of the Company, as of December 1, 1996, are as
follows:

                                                                     Year
                                                                     Became
Name                         Office                        Age       Officer
--------------------------------------------------------------------------------

W. Brian Matsuyama      Chairman of the Board and
                        Chief Executive Officer            50        1987

Ralph E. Boyd           President and Chief
                        Operating Officer                  59        1988

Jon T. Stoltz           Senior Vice President -
                        Planning and Rates                 49        1981

Larry E. Anderson       Vice President -
                        Operations                         48        1995

O. LeRoy Beaudry        Vice President -
                        Consumer and Public Affairs        58        1981

King C. Oberg           Vice President -
                        Gas Supply                         55        1993

Calvin R. Steele        Vice President -
                        Information Technology             57        1991

J. D. Wessling          Vice President - Finance, and
                        Chief Financial Officer            53        1995

James E. Haug           Treasurer and Chief
                        Accounting Officer                 47        1981

Larry C. Rosok          Corporate Secretary and
                        Personnel Director                 40        1995

    None of the above officers is related by blood, marriage or adoption to any
other of the above named officers.  Except as discussed below, each of the above
named officers has been employed by the Company in a management capacity for at
least the past five years.  None of the above officers hold directorships in
other public corporations.  All officers serve at the pleasure of the Board of
Directors.

    J. D. Wessling was employed by the Company on January 6, 1994 as Director-
Finance. From 1989 through 1993, he was chief financial officer for a retail
drug chain based in Phoenix, Arizona. From 1986 to 1989, he was chief financial
officer of a computer distribution company. Prior to that, Mr. Wessling spent
twelve years in the oil and gas industry, seven of which were with Atlantic
Richfield Company where he held various financial positions.


                                          13

<PAGE>

                                        PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

    The Common Stock is traded on the New York Stock Exchange under the symbol
CGC. The following table states the per share high and low sales prices of the
Common Stock.

                          1996                         1995
    Quarter         High        Low              High        Low

    First          16-5/8       15               14-7/8     13-1/4
    Second         16           13-3/8           15         13-1/2
    Third          16-1/2       13-3/4           15-1/2     13-1/2
    Fourth                                       17-3/8     14-5/8

    At November 29, 1996, there were approximately 10,836 holders of the Common
Stock.  The following table shows for the periods indicated the dividends paid
per share on the Common Stock.

              Quarter        1996           1995

              First          $.24           $.24
              Second         $.24           $.24
              Third          $.24           $.24
              Fourth                        $.24


                                          14

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>

(dollars in thousands except per share data)
                                              Nine Months
                                              Ended Sep 30                 Twelve Months Ended December 31
                                              ------------      ---------------------------------------------------
                                                 1996           1995           1994           1993             1992
<S>                                           <C>               <C>            <C>            <C>           <C>
STATEMENTS OF OPERATIONS:

 Operating Revenues:
    Gas Sales                                    $  114,548     $  171,254     $  185,341     $  179,979    $  145,889
    Transportation Revenue                           12,973         11,300          6,871          7,087         6,423
    Other Operating Income                              144            190            198            388           154
                                              -------------    -----------    -----------    -----------   -----------
                                                    127,665        182,744        192,410        187,454       152,466
 Less:  Gas Purchases                                69,679        102,858        118,083        113,500        90,320
        Revenue Taxes                                 8,420         11,480         11,500         11,095         8,997
                                              -------------    -----------    -----------    -----------   -----------
 Operating Margin                                    49,566         68,406         62,827         62,859        53,149
                                              -------------    -----------    -----------    -----------   -----------
 Cost of Operations:
    Operating expenses                               25,058         30,818         30,202         27,856        25,576
    Depreciation and amortization                     9,362         11,733         10,921          9,964         9,175
    Property and payroll taxes                        3,181          4,051          4,039          3,757         3,516
                                              -------------    -----------    -----------    -----------   -----------
                                                     37,601         46,602         45,162         41,577        38,267
                                              -------------    -----------    -----------    -----------   -----------
 Earnings From Operations                            11,965         21,804         17,665         21,282        14,882
                                              -------------    -----------    -----------    -----------   -----------
 Nonoperating Expense (Income):
    Interest                                          7,459          9,938          8,090          7,038         7,478
    Interest charged to construction                  (569)          (394)          (203)          (323)          (218)
                                              -------------    -----------    -----------    -----------   -----------
                                                      6,890          9,544          7,887          6,715         7,260
    Amortization of debt issuance expense               459            606            593            562           402
    Other                                               (2)          (586)           (80)          (113)          (440)
                                              -------------    -----------    -----------    -----------   -----------
                                                      7,347          9,564          8,400          7,164         7,222
                                              -------------    -----------    -----------    -----------   -----------
 Earnings Before Income Taxes and Cumulative
    Effect of change in accounting method             4,618         12,240          9,265         14,118         7,660
 Income Taxes                                         1,606          4,508          3,505          5,224         2,817
                                              -------------    -----------    -----------    -----------   -----------

 Earnings Before Cumulative Effect of Change
    in Accounting Method                              3,012          7,732          5,760          8,894         4,843
 Cumulative effect of change
        accounting method                                 -              -              -            209             -
                                              -------------    -----------    -----------    -----------   -----------
 Earnings Before Preferred Dividends                  3,012          7,732          5,760          9,103         4,843
 Preferred Dividends                                    393            539            558            580           595
                                              -------------    -----------    -----------    -----------   -----------
 Net Earnings                                      $  2,619       $  7,193       $  5,202       $  8,523      $  4,248
                                              -------------    -----------    -----------    -----------   -----------
                                              -------------    -----------    -----------    -----------   -----------

 Common Stock Outstanding
  (thousands of shares):
    End of year                                      10,787          9,144          8,912          8,566         7,614
    Average                                           9,266          8,997          8,707          7,915         6,681

 Earnings per Common Share
    Before cumulative effect of change
         in accounting method                       $  0.28        $  0.80        $  0.60        $  1.05       $  0.64
    Cumulative effect of change
         in accounting method                             -              -              -           0.03           -
                                              -------------    -----------    -----------    -----------   -----------
 Net Earnings per Common Share                      $  0.28        $  0.80        $  0.60        $  1.08       $  0.64
                                              -------------    -----------    -----------    -----------   -----------
                                              -------------    -----------    -----------    -----------   -----------

                                         15

<PAGE>

<CAPTION>

ITEM 6. SELECTED FINANCIAL DATA. (CONTINUED)

(dollars in thousands except per share data)
                                                   Sep 30                           At December 31
                                                                ------------------------------------------------------
                                                    1996          1995           1994           1993          1992

<S>                                              <C>            <C>            <C>            <C>           <C>
RETAINED EARNINGS:
    Beginning of the year                         $   9,297      $  10,806      $  14,076      $  13,455     $  15,655
    Net earnings after preferred dividends            2,619          7,193          5,202          8,523         4,248
    Common dividends                                (7,015)        (8,702)        (8,472)        (7,902)       (6,448)
                                                 ----------     ----------     ----------     ----------    ----------
    End of the year                               $   4,901      $   9,297      $  10,806      $  14,076     $  13,455
                                                 ----------     ----------     ----------     ----------    ----------
                                                 ----------     ----------     ----------     ----------    ----------

CAPITAL STRUCTURE:
    Common shareholders' equity                   $ 109,126      $  89,539      $  87,710      $  85,702     $  69,199
    Redeemable preferred stocks                       6,851          6,851          7,217          7,528         7,951
                                                 ----------     ----------     ----------     ----------    ----------

    Debt:
         Long-term debt                             101,850        102,100        100,000         87,000        74,677
         Notes Payable                                    -         32,000         14,501         13,502        13,000
         Current maturities of long-term debt             -              -          5,000              -           -
                                                 ----------     ----------     ----------     ----------    ----------
                                                    101,850        134,100        119,501        100,502        87,677
                                                 ----------     ----------     ----------     ----------    ----------

    Total capital                                $  217,827     $  230,490     $  214,428     $  193,732    $  164,827
                                                 ----------     ----------     ----------     ----------    ----------
                                                 ----------     ----------     ----------     ----------    ----------
FINANCIAL RATIOS:
    Return on common shareholders' equity             7.88%          8.12%          6.00%         11.00%          6.72%

    Common stock dividend payout ratio                 257%           120%           161%            87%           146%

    Dividends paid in cash per common share         $  0.72        $  0.96        $  0.96        $  0.94       $  0.93

    Fixed charge coverage
     (before income tax deduction):
         Times interest earned                         2.17           2.16           2.07           2.86          1.97
         Times interest and preferred
           dividends earned                            2.01           2.00           1.87           2.55          1.76

    Book value per year-end share
      of common stock                              $  10.12        $  9.79        $  9.84       $  10.00       $  9.09

UTILITY PLANT:
    Utility plant - end of year                  $  383,771     $  362,924     $  333,863     $  315,297    $  283,871
    Accumulated depreciation                        147,599        138,831        127,806        117,925       109,184
                                                 ----------     ----------     ----------     ----------    ----------
    Net plant                                    $  236,172     $  224,093     $  206,057     $  197,372    $  174,687
                                                 ----------     ----------     ----------     ----------    ----------
                                                 ----------     ----------     ----------     ----------    ----------

    Construction expenditures                     $  26,053      $  37,637      $  27,251      $  32,990     $  35,335
                                                 ----------     ----------     ----------     ----------    ----------
                                                 ----------     ----------     ----------     ----------    ----------
    Total assets                                 $  296,381     $  296,898     $  273,090     $  252,690    $  224,685
                                                 ----------     ----------     ----------     ----------    ----------
                                                 ----------     ----------     ----------     ----------    ----------

</TABLE>

 

                                          16

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.

    Cascade changed its year end to September 30 this year. The new year end
allows reporting of a fall-winter heating season (October through March) in a
single fiscal year, which management believes is more meaningful reporting than
separating a heating season into two years. The following is management's
assessment of the Company's financial condition and a discussion of the
principal factors that affect consolidated results of operations for the 12-
month periods ended September 30, 1996, 1995, and 1994.

EARNINGS AND DIVIDENDS

    Consolidated company results for the three periods were:

                                             12 MONTHS ENDED SEPTEMBER 30
                                              1996         1995      1994
STATEMENTS OF OPERATIONS (UNAUDITED)
                                  (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
OPERATING REVENUES
    Gas sales                                 $167,923    $177,825    $181,889
    Transportation revenue                      16,454      10,353       6,884
    Other operating income                         195         192         253
                                             ----------------------------------
                                               184,572     188,370     189,026
Less Gas purchases                             101,299     108,600     116,360
    Revenue taxes                               11,692      11,682      11,226
                                             ----------------------------------
OPERATING MARGIN                                71,581      68,088      61,440
                                             ----------------------------------
COST OF OPERATIONS
    Operating expenses                          32,776      30,456      29,661
    Depreciation and amortization               12,389      12,141      10,690
    Property and payroll taxes                   4,115       3,986       3,994
                                             ----------------------------------
                                                49,280      46,583      44,345
                                             ----------------------------------
    Earnings from operations                    22,301      21,505      17,095
                                             ----------------------------------
NONOPERATING EXPENSE (INCOME)
    Interest                                    10,101       9,632       7,540
    Interest charged to construction             (753)       (292)       (178)
                                             ----------------------------------
                                                 9,348       9,340       7,362
    Amortization of debt issuance expense          612         603         587
    Other                                        (142)       (115)       (657)
                                             ----------------------------------
                                                 9,818       9,828       7,292
                                             ----------------------------------

EARNINGS BEFORE INCOME TAXES                    12,483      11,677       9,803
INCOME TAXES                                     4,272       4,590       3,452
                                             ----------------------------------

EARNINGS BEFORE PREFERRED DIVIDENDS              8,211       7,087       6,351
PREFERRED DIVIDENDS                                524         544         562
                                             ----------------------------------
NET EARNINGS                                    $7,687      $6,543      $5,789
                                             ----------------------------------
                                             ----------------------------------

COMMON STOCK OUTSTANDING (THOUSANDS OF
 SHARES)
    End of year                                 10,787       9,098       8,851
    Average                                      9,204       8,936       8,624

NET EARNINGS PER COMMON SHARE                    $0.84       $0.73       $0.67
                                             ----------------------------------
                                             ----------------------------------


                                          17

<PAGE>

    Per share results for the twelve months ended September 30, 1996 were 15.1%
greater than 1995 because of increased operating margin. Earnings for 1996 were
negatively affected $0.10 per share due to a third quarter (ended June 30, 1996)
charge against income for unrecovered gas costs and valuation adjustments to
non-utility assets. Earnings were also negatively affected $0.02 per share by
one time expenses related to the change in year end. Per share net earnings for
1995 were greater than 1994 by 9% due to improved operating margins.

RESIDENTIAL AND COMMERCIAL OPERATING MARGIN

    An 8,442 increase in the number of residential and commercial customers,
combined with somewhat colder weather in the twelve months ended September 30,
1996, contributed to a $4.0 million increase in core operating margin.

Operating Margins
(dollars in thousands)
--------------------------------------------------------------------------------
                                                     Twelve Months Ended
                                                          September 30
                                               ---------------------------------
                                                 1996        1995        1994
                                               ---------------------------------
Degree Days                                      5,620       5,607       5,301
--------------------------------------------------------------------------------
Average Customers
  Residential                                  127,089     119,633     111,055
  Commercial                                    23,741      22,755      21,794
--------------------------------------------------------------------------------
Consumption Per Customer (therms)
  Residential                                      801         782         756
  Commercial                                     4,357       4,445       4,391
--------------------------------------------------------------------------------
Margin
  Residential                                $  26,100   $  23,586   $  20,795
  Commercial                                 $  19,794   $  18,255   $  16,753
--------------------------------------------------------------------------------


    The twelve month period ending September 30, 1995 was 6% colder than the
twelve month period ending September 30, 1994 which, along with an increase of
9,540 residential and commercial customers contributed to increased core margin
of $4.3 million. Degree days in the 1995 period were essentially normal.

INDUSTRIAL AND NON-CORE OPERATING MARGIN

    Industrial and non-core operating margin was $25.7 million, $26.2 million,
and $23.9 million,  in the twelve month periods ended September 30, 1996, 1995,
and 1994, respectively.

    Operating margin was affected by the June 1996 charge of $1.2 million to
establish a reserve for unrecovered gas costs. The reserve resulted from
management's determination that such costs are appropriately recoverable through
non-core gas commodity sales, which are dependent on future competitive
conditions for large volume supplies, rather than from the more certain source
of recovery through rates charged to core customers. Excluding the effect of the
one time charge, industrial and non-core margin increased by 3% from the twelve
months ended September 30, 1995. This was primarily due to the addition of a new
cogeneration customer in April 1996 and a full year's operating margin from a
cogeneration customer that commenced June 1995, as well as increased consumption
by refinery customers. Partially offsetting the increases was a margin reduction
from cogeneration curtailment due to the significant availability of competing


                                          18

<PAGE>

hydropower. There were also decreases in consumption by forest products and
agricultural customers and the shift of certain customers to special contracts
with lower distribution service rates.

    In the twelve months ended September 30, 1995, operating margin from the
industrial non-core market increased of $2.3 million as the result of a
cogeneration customer starting in April 1994 and the above mentioned start up in
June 1995 of a new cogeneration plant.

OPERATING EXPENSES

    Operating expenses were $32.8 million, $30.5 million, and $29.7 million for
the twelve month periods ended September 30, 1996, 1995, and 1994, respectively.

    Operating expenses, approximately 70% of which are payroll and benefits
costs, increased over the 1995 period by $2.3 million, or 7.6%. Retirement plans
expense increased $700,000 due to recognizing Washington retiree medical
benefits formerly deferred, and changes in interest rate assumptions that
affected actuarial calculations and resulted in higher expense for fiscal 1996.
At this time, it appears the interest rate assumption for fiscal year 1997 will
be the same as that used in 1996. Salary and wage increases amounted to
$700,000, or 3.4%. Almost $300,000 of this increase was due to accruals for
vacation earned but not used prior to the new fiscal year end. There were also
increases in purchased services for legal, accounting and other consulting,
$48,000 of which were one time expenses related to the change in year end.
Mitigating the expense increase was a stable number of employees serving an
increasing number of customers. Another moderating factor was the increase in
payroll capitalized due to increased construction activity.

    Operating expenses increased 2.7% in the 1995 period compared to 1994.
There were no changes in the number of employees and benefits costs were not
affected by interest rate changes.

DEPRECIATION AND AMORTIZATION, PROPERTY AND PAYROLL TAXES

    Depreciation and amortization were up 2% in the twelve month period ended
September 30, 1996 over the 1995 period. The moderate increase was due to a
build up of construction in progress resulting from the facilities for a new
cogeneration customer and expansion of facilities in western Washington.
Property and payroll taxes increased 3% in 1996 over 1995 consistent with
increased plant in service. Taxes in 1995 were essentially unchanged from 1994
due to 1990 voter mandated reductions in property tax rates in Oregon.

INTEREST EXPENSE AND OTHER

    Total interest expense in the twelve months ended September 30, 1996 was
virtually unchanged from interest expense incurred in the 1995 period. Average
short-term borrowings were higher in 1996 resulting in higher interest expense
of $400,000 and interest on deferred gas cost savings increased $576,000 due to
increased balances. Offsetting the increases was a reduction of interest
attributable to a decrease in long-term debt of $3.1 million reflecting a
decrease in appliance loans held by Cascade Land Leasing, a subsidiary. Other
expense includes charges of $333,000 in fiscal 1996 and $700,000 in fiscal 1995
for revaluation of certain assets held for sale and a reduction in interest
income from appliance loans.

    Total interest expense and other in the 1995 period increased $2.5 million.
The increase is the result of issuing $18 million of additional long-term debt
in October 1994 plus accrued interest on


                                          19

<PAGE>

deferred gas cost reductions and discontinuance of interest rate swaps amortized
over the term of the underlying debt agreement.


                            LIQUIDITY AND CAPITAL RESOURCES

    In August, 1996, Cascade issued 1,487,700 additional shares of common stock
in an underwritten public offering. The offering netted $21.6 million in
proceeds which were used to pay down short-term debt of $17.5 million. The
remainder was invested in short-term securities. Equity capital of $2.4 million
was also raised from issuance of shares to participants in the Company's 401(k)
plan and its Dividend Reinvestment Plan.

    The seasonal nature of the Company's business creates short-term cash
requirements to finance customer accounts receivable and construction
expenditures. To provide working capital for these requirements, the Company has
a five-year credit commitment for $40 million from three banks. The committed
lines also support a money market facility of a similar amount and a regional
commercial paper program. A subsidiary has a $5 million five-year revolving
credit facility used for non-regulated business, and at September 30, 1996,
$1.85 million was outstanding. The Company also has $25 million of uncommitted
lines from three banks.

    Longer term financing is provided by a Medium-Term Note program with $100
million outstanding at September 30, 1996, and $50 million registered under the
Securities Act of 1933 and available for issuance. Because of the availability
of short-term credit and the ability to issue long-term debt and additional
equity, management believes it has adequate financial flexibility to meet its
anticipated cash needs.

CAPITAL EXPENDITURES


                                                     Twelve Months Ended
 (dollars in thousands)                                   September 30
                                             ----------------------------------
                                                  1996        1995       1994
                                             ----------------------------------
 Capital Expenditures                        $  41,106   $  30,947  $  27,530
                                             ----------------------------------
 Operating Cash Flow                         $  45,176   $  23,883  $  11,193

 Dividends Paid                                 (8,636)     (8,176)    (8,038)
 Redemption of Preferred                          (345)       (301)      (438)
                                             ----------------------------------
 Available Cash Flow                         $  36,195   $  15,406   $  2,717
                                             ----------------------------------
                                             ----------------------------------
 Internally Funded Expenditures                  88.05%      49.78%      9.87%


    Primarily because of two large projects, one for facilities for a new
cogeneration customer and one for enhancement of facilities in western
Washington, capital spending was at a record level in fiscal 1996. Internally
generated cash flow increased in 1996 as well in large part due to lower gas
costs and an increase in accounts payable and accrued expenses. Accounts payable
increased due to timing of gas cost payments. A portion of lower deferred gas
costs is being refunded to core customers starting August 1996 which will reduce
available cash flow going forward. Budgeted capital expenditures for 1997 will
approximate $32 million and are expected to be financed 30% to 40% from
operating cash flow net of common and preferred dividends. Over the next five
years it is expected that capital expenditures will be approximately $150
million.


                                          20

<PAGE>

                                  REGULATORY MATTERS

    On July 22, 1996, the WUTC issued its final order reflecting the terms of a
negotiated settlement among the Company, the WUTC staff, the Public Counsel for
the State of Washington, and the Northwest Industrial Gas Users, of three
separate rate applications filed by the Company in 1995 and 1996. The new rates
were effective August 1, 1996. The order approves the  first general rate
increase in the State of Washington by the Company since 1986, estimated to
increase revenues by approximately $3.8 million in the first year. Offsetting
the general rate increase for the first four years are technical credits for
core customers amounting to approximately $263,000 per year. Other elements of
the approved settlement include: (i) increases in monthly customer service
charges to core customers by $1.00 on August 1 in each of 1997 and 1998, offset
by simultaneous decreases in charges to non-core customers; (ii) the refund to
core customers of deferred gas cost reductions estimated to be $1.4 million
annually for four years, and the refund of an additional $13 million in deferred
gas cost savings plus accrued interest beginning in four years, neither of which
will have an effect on the Company's earnings; (iii) an agreement by the Company
not to apply for another general rate increase for at least three years from
August 1, 1996; and (iv) the Company's commitment to prepare a plan to reduce
meter reading and billing expense.

    Concurrent with the August 1, 1996, effective date of new Washington rates,
Cascade commenced the amortization of deferred postretirement benefits other
than pensions (PBOP). Consistent with the WUTC's policy statement issued in 1992
regarding these costs, PBOP expenses attributable to Washington operations in
excess of amounts previously charged on a "pay-as-you-go" basis have been
deferred since 1993. The amount of the incremental expense, including
amortization, will be approximately $1.5 million per year. Amortization will be
completed at December 31, 2002.

                               EFFECTS OF INFLATION

    Changing prices have had minimal impact on the Company's operating margins
in the last three years. The effects of price changes in purchased gas costs and
the cost of transporting gas to the Company's system are, for the most part,
passed on to customers in accordance with regulatory policy. Inflationary
increases in wages and other operating expenses are generally recognized by the
regulatory agencies in their rate decisions in general rate filings.

                               NINE MONTHS COMPARISON

    The following nine-month comparison is presented because of the change in
1996 of the Company's fiscal year from a calendar year to a year ending
September 30.

                                         Nine Months Ended September 30
                                               1996         1995
                                              audited     unaudited
                                              -------     ---------
                                  (dollars in thousands except per share data)
         Operating Revenue                   $ 127,665   $ 125,837
         Operating Margin                       49,566      46,391
         Cost of Operations                     37,601      34,922
         Nonoperating Expense                    7,347       7,094
         Net Earnings                            2,619       2,125
         Earnings Per Share                    $  0.28     $  0.24


                                          21

<PAGE>

    Nine month earnings ended September 30, 1996 were negatively affected by
several factors: 1) the after tax charge against income of $753,000 to establish
a reserve for unrecovered gas costs; 2) after tax charges of $216,000 for
revaluation of non regulated assets; 3) after tax accruals of $215,000 as a
result of the change in year end; and 4) an after tax expense increase of
$234,000 primarily for actuarial changes in interest rate assumptions for the
retirement plans. Additionally, there was $81,000 of after tax expense related
to the amortization of Washington deferred postretirement medical cost which
commenced with the Washington general rate case order.

 ------------------------------------------------------------------------------

                              FORWARD-LOOKING STATEMENTS

Statements contained in this report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are subject to risks
and uncertainties that may cause actual future results to differ materially.
Such risks and uncertainties with respect to the Company include its ability to
successfully implement internal performance goals, competition from alternative
forms of energy, the effects of state and federal regulation, performance issues
with key natural gas suppliers, the capital-intensive nature of the Company's
business, regulatory issues, including rate relief to recover increased capital
and operating costs, the weather, competition, exposure to environmental cleanup
requirements, general economic conditions and specific economic conditions in
the Company's service area.


                                          22

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


INDEPENDENT AUDITORS' REPORT

Board of Directors
Cascade Natural Gas Corporation
Seattle, Washington

We have audited the accompanying consolidated balance sheets of Cascade Natural
Gas Corporation and subsidiaries (the Corporation) as of September 30, 1996, and
December 31, 1995, and the related consolidated statements of net earnings,
common shareholders' equity, and cash flows for the nine months ended September
30, 1996, and each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Corporation's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cascade Natural Gas Corporation and
subsidiaries as of September 30, 1996, and December 31, 1995, and the results of
their operations and their cash flows for the nine months ended September 30,
1996, and each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.



DELOITTE & TOUCHE LLP



November 1, 1996


                                          23


<PAGE>

                CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF NET EARNINGS

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

                                               NINE MONTHS ENDED         YEARS ENDED
                                                 SEPTEMBER 30            DECEMBER 31
                                                     1996           1995           1994
                                                   (NOTE 2)

<S>                                               <C>            <C>            <C>
OPERATING REVENUES
   Gas sales                                      $  114,548     $  171,254     $  185,341
   Transportation revenue                             12,973         11,300          6,871
   Other operating income                                144            190            198
                                                  -----------    -----------    -----------
                                                     127,665        182,744        192,410
   Less
       Gas purchases                                  69,679        102,858        118,083
       Revenue taxes                                   8,420         11,480         11,500
                                                  -----------    -----------    -----------
OPERATING MARGIN                                      49,566         68,406         62,827
                                                  -----------    -----------    -----------

COST OF OPERATIONS
   Operating expenses                                 25,058         30,818         30,202
   Depreciation and amortization                       9,362         11,733         10,921
   Property and payroll taxes                          3,181          4,051          4,039
                                                  -----------    -----------    -----------
                                                      37,601         46,602         45,162
                                                  -----------    -----------    -----------
   Earnings from operations                           11,965         21,804         17,665
                                                  -----------    -----------    -----------
NONOPERATING EXPENSE (INCOME)
   Interest                                            7,459          9,938          8,090
   Interest charged to construction                     (569)          (394)          (203)
                                                  -----------    -----------    -----------
                                                       6,890          9,544          7,887
   Amortization of debt issuance expense                 459            606            593
   Other                                                  (2)          (586)           (80)
                                                  -----------    -----------    -----------
                                                       7,347          9,564          8,400
                                                  -----------    -----------    -----------

EARNINGS BEFORE INCOME TAXES                           4,618         12,240          9,265

INCOME TAXES                                           1,606          4,508          3,505
                                                  -----------    -----------    -----------
EARNINGS BEFORE PREFERRED DIVIDENDS                    3,012          7,732          5,760

PREFERRED DIVIDENDS                                      393            539            558
                                                  -----------    -----------    -----------
NET EARNINGS                                        $  2,619       $  7,193       $  5,202
                                                  -----------    -----------    -----------
NET EARNINGS PER COMMON SHARE                        $  0.28        $  0.80        $  0.60
                                                  -----------    -----------    -----------
AVERAGE SHARES OUTSTANDING                             9,266          8,997          8,707
                                                  -----------    -----------    -----------
</TABLE>

See notes to consolidated financial statements


                                       24

<PAGE>

                CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


(DOLLARS IN THOUSANDS)

ASSETS                                           SEPTEMBER 30      DECEMBER 31
                                                     1996             1995

UTILITY PLANT   (Note 3)                          $  383,771         $362,924
     Less accumulated depreciation                   147,599          138,831
                                                  -----------      -----------
                                                     236,172          224,093
     Construction work in progress                    19,497           14,957
                                                  -----------      -----------
                                                     255,669          239,050
                                                  -----------      -----------

OTHER ASSETS
     Investments in non utility property                 667              919
     Notes receivable, less current maturities         1,777            2,426
                                                  -----------      -----------
                                                       2,444            3,345
                                                  -----------      -----------

CURRENT ASSETS
     Cash and cash equivalents                           543            2,197
     Accounts receivable, less allowance of
       $439 and $425 for doubtful accounts            11,646           26,483
     Current maturities of notes receivable              631              809
     Materials, supplies, and inventories              6,063            6,047
     Prepaid expenses and other assets                 5,723            2,353
                                                  -----------      -----------
                                                      24,606           37,889
                                                  -----------      -----------

DEFERRED CHARGES                                      13,662           16,614

                                                  -----------      -----------
                                                  $  296,381       $  296,898
                                                  -----------      -----------
                                                  -----------      -----------

See notes to consolidated financial statements


                                       25

<PAGE>

                CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)


COMMON SHAREHOLDERS' EQUITY,
PREFERRED STOCKS, AND LIABILITIES                     SEPTEMBER 30  DECEMBER 31
                                                          1996         1995

COMMON SHAREHOLDERS' EQUITY
     Common stock, par value $1 per share (Note 5)
        Authorized, 15,000,000 shares; issued and
        outstanding, 10,786,585 and 9,144,448 shares   $   10,787  $    9,144
     Additional paid-in capital                            93,438      71,098
     Retained earnings                                      4,901       9,297
                                                       ----------- -----------
                                                          109,126      89,539
                                                       ----------- -----------


REDEEMABLE PREFERRED STOCKS,   (Note 4)
     aggregate redemption amount of $7,097 and $7,103       6,851       6,851
                                                       ----------- -----------


LONG-TERM DEBT   (Note 7)                                 101,850     102,100
                                                       ----------- -----------

CURRENT LIABILITIES
     Notes payable (Note 6)                                    --      32,000
     Accounts payable                                      17,599      16,392
     Property, payroll, and excise taxes                    3,113       4,578
     Dividends and interest payable                         6,570       4,365
     Other current liabilities                              2,931       4,646
                                                       ----------- -----------
                                                           30,213      61,981
                                                       ----------- -----------

DEFERRED CREDITS
     Gas cost changes                                      21,578      10,934
     Income taxes (Note 8)                                 16,184      16,461
     Investment tax credits                                 3,031       3,207
     Other                                                  7,548       5,825
                                                       ----------- -----------
                                                           48,341      36,427
                                                       ----------- -----------

COMMITMENTS AND CONTINGENCIES   (Notes 10 and 11)             -           -
                                                       ----------- -----------
                                                       $  296,381  $  296,898
                                                       ----------- -----------
                                                       ----------- -----------


See notes to consolidated financial statements


                                       26

<PAGE>

                 CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                                                         COMMON STOCK               ADDITIONAL         RETAINED
                                                                   SHARES           PAR VALUE     PAID-IN CAPITAL      EARNINGS
<S>                                                               <C>                <C>             <C>                <C>
BALANCE, DECEMBER 31, 1993                                        8,566,374          $  8,566        $  63,060          $14,076

    Common stock issued:
        Employee savings plan and
            retirement trust (401(k))                                48,959                49              690
        Director stock award plan                                     1,200                 1               18
        Dividend reinvestment plan                                  295,128               296            4,222
    Redemption of preferred stock                                                                            2
    Cash dividends:

        Common stock, $.96 per share                                                                                     (8,472)
        Preferred stock, senior, $.55 per share                                                                             (87)
        7.85% cumulative preferred stock,
            $7.85 per share                                                                                                (471)
    Earnings before preferred dividends                                                                                   5,760
                                                                 ----------        ----------       ----------       ----------
BALANCE, DECEMBER 31, 1994                                        8,911,661             8,912           67,992           10,806

    Common stock issued:
        Employee savings plan and
            retirement trust (401(k))                                50,373                50              677
        Director stock award plan                                     1,200                 1               15
        Dividend reinvestment plan                                  181,214               181            2,409
    Redemption of preferred stock                                                                            5
    Cash dividends:
        Common stock, $.96 per share                                                                                     (8,702)
        Preferred stock, senior, $.55 per share                                                                             (68)
        7.85% cumulative preferred stock,
            $7.85 per share                                                                                                (471)
    Earnings before preferred dividends                                                                                   7,732
                                                                 ----------        ----------       ----------       ----------
BALANCE, DECEMBER 31, 1995                                        9,144,448             9,144           71,098            9,297

    Common stock issued:
        Public offering                                           1,487,700             1,488           20,108
        Employee savings plan and
            retirement trust (401(k))                                33,893                34              492
        Director stock award plan                                     1,800                 2               26
        Dividend reinvestment plan                                  118,744               119            1,714
    Cash dividends:
        Common stock, $.96 per share                                                                                     (7,015)
        Preferred stock, senior, $.55 per share                                                                             (40)
        7.85% cumulative preferred stock,
            $7.85 per share                                                                                                (353)
    Earnings before preferred dividends                                                                                   3,012
                                                                 ----------        ----------       ----------       ----------
BALANCE, SEPTEMBER 30, 1996                                      10,786,585           $10,787        $  93,438         $  4,901
                                                                 ----------        ----------       ----------       ----------
                                                                 ----------        ----------       ----------       ----------
</TABLE>


See notes to consolidated financial statements



                                       27

<PAGE>

                CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

(DOLLARS IN THOUSANDS)

                                                                            NINE MONTHS ENDED              YEARS ENDED
                                                                              SEPTEMBER 30                 DECEMBER 31
                                                                                  1996                1995             1994
<S>                                                                              <C>                <C>              <C>
OPERATING ACTIVITIES
   Earnings before preferred dividends                                           $  3,012           $  7,732         $  5,760
   Adjustments to reconcile earnings before preferred dividends to
         net cash provided by operating activities:
      Depreciation                                                                  9,362             12,131           11,239
      Write-down of assets                                                            154                  -              700
      Amortization of gas cost changes                                              1,308              3,508           (3,361)
      Increase (decrease) in deferred income taxes                                   (276)             1,079            1,674
      Decrease in deferred investment tax credits                                    (175)              (265)            (275)
      Cash provided (used) by changes in operating assets and liabilities:
         Accounts receivable                                                       14,835              2,400           (2,346)
         Income taxes                                                              (2,905)               105             (476)
         Inventories                                                                  481                201              34
         Gas cost changes                                                           9,336              2,226           4,993
         Deferred items                                                             4,345             (4,144)            (662)
         Accounts payable and accrued expenses                                        281              1,560           (3,661)
         Prepaid expenses and other assets                                           (512)            (1,111)            (725)
         Other                                                                        (16)              (399)             (43)
                                                                              ------------       ------------     ------------
   Net cash provided by operating activities                                       39,230             25,023           12,851
                                                                              ------------       ------------     ------------

INVESTING ACTIVITIES
   Capital expenditures                                                           (26,053)           (37,637)         (27,251)
   New consumer loans                                                                (666)            (1,243)          (1,393)
   Receipts on consumer loans                                                       1,511              2,277            2,580
   Purchase of securities available for sale                                         -                (4,107)          (1,502)
   Proceeds from securities available for sale                                       -                 5,605              752
                                                                              ------------       ------------     ------------
   Net cash used by investing activities                                          (25,208)           (35,105)         (26,814)
                                                                              ------------       ------------     ------------

FINANCING ACTIVITIES
   Issuance of common stock                                                        23,155              2,293            4,400
   Redemption of preferred stock                                                       --               (362)            (309)
   Proceeds from long-term debt, net                                                   --              2,100           17,838
   Repayment of long-term debt                                                       (250)            (5,000)              --
   Proceeds from (repayment of) notes payable, net                                (32,000)            17,499              999
   Dividends paid                                                                  (6,581)            (8,200)          (8,154)
                                                                              ------------       ------------     ------------
   Net cash provided (used) by financing activities                               (15,676)             8,330           14,774
                                                                              ------------       ------------     ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               (1,654)            (1,752)             811

CASH AND CASH EQUIVALENTS
   Beginning of year                                                                2,197              3,949           3,138
                                                                              ------------       ------------     ------------
   End of year                                                                   $    543           $  2,197        $  3,949
                                                                              ------------       ------------     ------------

                                                                              ------------       ------------     ------------

SUPPLEMENTAL CASH FLOW INFORMATION
   Cash paid during the year for:
      Interest (net of amounts capitalized)                                      $  6,890           $  8,597        $  7,381
      Income taxes                                                               $  1,606           $  2,786        $  2,567
</TABLE>

See notes to consolidated financial statements



                                       28


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS

Cascade Natural Gas Corporation (the Company) is a local distribution company
(LDC) engaged in the distribution of natural gas. The Company's service
territory consists primarily of towns in Washington and Oregon, ranging from the
Canadian border in northwestern Washington to the Idaho border in eastern
Oregon.

As of  September 30, 1996, the Company had approximately 152,000 core customers
and 152 non-core customers. Core customers are principally residential and small
commercial and industrial customers who take traditional "bundled" natural gas
service which includes supply, peaking service, and upstream interstate pipeline
transportation. Sales to core customers account for approximately 21% of  gas
deliveries and 70% of operating margin. The Company's sales to its core
residential and commercial customers are influenced by  fluctuations in
temperature, particularly during the winter season.  A warm winter season will
tend to reduce gas consumption.   Over the longer term, these fluctuations tend
to offset each other, as rates charged to customers are developed based on the
assumption of normal weather.

Non-core customers are generally large industrial and institutional customers
who have chosen "unbundled" service, meaning that they select from among several
supply and upstream pipeline transportation options, independent of the
Company's distribution service. The Company's margin from non-core customers is
derived only from this distribution service. The principal industrial activities
of its customers include the processing of forest products, production of
chemicals, refining of crude oil, production of aluminum, generation of
electricity, and processing of food.

The Company is subject to regulation of most aspects of its operations by the
Washington Utilities and Transportation Commission (WUTC) and the Oregon Public
Utility Commission (OPUC). It is subject to regulatory risk primarily with
respect to recovery of costs incurred. Various deferred charges and deferred
credits reflect assumptions regarding recovery of certain costs through
amortization during future periods.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company's accounting records and practices conform to the requirements and
uniform system of accounts prescribed by the WUTC and the OPUC.

CHANGE IN YEAR END:  Beginning in 1996, the Company changed its fiscal year end
to September 30 to include the fall-winter heating season within a single
financial reporting period.  As a result of this change, the reporting period
for 1996, unless otherwise noted, is the nine months ended September 30, 1996.
The period ended September 30, 1996 is not indicative of a full year.

PRINCIPLES OF CONSOLIDATION:  The consolidated financial statements include the
accounts of Cascade Natural Gas Corporation and its wholly owned subsidiaries:
Cascade Land Leasing Co.; CGC Properties, Inc.; CGC Energy, Inc.; and CGC
Resources,  Inc.   All intercompany transactions have been eliminated in
consolidation.

UTILITY PLANT:  Utility plant is stated at the historical cost of construction.
These costs include payroll-related costs such as taxes and other employee
benefits, general and administrative costs, and the estimated cost of  funds
used during construction.  Maintenance and repairs of property, and replacements
and renewals of items deemed to be less than units of property, are charged to
operations.  Units of utility plant retired or replaced are credited to property
accounts at cost.  Such amounts plus removal expense, less salvage, are charged
to accumulated depreciation.  In the case of a sale of land or major operating
units, the resulting gain or loss on the sale is included in other income  or
expense.

Depreciation of utility plant is computed using the straight-line method.  The
asset lives used for computing depreciation range from five to forty  years,
and the weighted average annual depreciation rate is approximately 3.5%.


                                       29
<PAGE>


INVESTMENTS:  Investments consist primarily of real estate, classified as
nonutility property carried at estimated net realizable value.

NOTES RECEIVABLE:  Notes receivable include loans made to customers for the
purchase of energy efficient appliances, which are generally the security for
the loan.  Loans are made for a term of five years at interest rates varying
from 6.5% to 12%.

MATERIALS, SUPPLIES AND INVENTORIES:  Materials and supplies for construction
and maintenance are recorded at cost.  Inventories of natural gas are stated at
the lower of average cost or market.

DEFERRED CHARGES:  Deferred charges consist primarily of debt  issuance costs
and deferrals of postretirement health care expenses (Note 9).  Debt issuance
costs are amortized over the lives of the related issues.  Redemption costs
relating to refinanced debt are amortized over the life of the new debt
issuance.

REVENUE RECOGNITION:  The Company accrues estimated  revenues for gas delivered
but not billed to residential and commercial customers from the meter reading
dates to month end.

GAS COST CHANGES:  Gas cost changes consist primarily of the effects  of net
decreases in purchased gas costs which have not yet been reflected in rates
charged to customers.  The effects of changes that are not tracked on a
concurrent basis are deferred and amortized over a future period through a
temporary rate change schedule.  Amortization is subject to approval by the
regulatory agencies, and  amortization periods are generally one to four years.

FEDERAL INCOME TAXES:  The Company deducts depreciation computed on an
accelerated basis for federal income tax purposes, and as a result, deductions
exceed the amounts included in the financial statements.

In 1981, the Company elected to record depreciation on 1981 and subsequent
utility plant additions under the Accelerated Cost Recovery System.  This
election required the Company to provide deferred income taxes on the difference
between depreciation computed for financial statement and tax reporting purposes
beginning in 1981 (Note 8).  This procedure has been accepted by the WUTC and
the OPUC.

It is expected that any future increases in federal income taxes resulting from
the reversal of accelerated depreciation on additions to utility plant in 1980
and prior will be allowed in future rate determinations.

INVESTMENT TAX CREDITS:  Investment tax credits were deferred and are amortized
over the life of the property giving rise to the credit.

STATEMENTS OF CASH FLOWS:  For purposes of the statements of cash flows, the
Company considers all liquid investments with a purchased maturity of
approximately three months or less to be cash equivalents.

USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles  requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

The Company has used significant estimates in measuring certain deferred charges
and deferred credits related to items subject to approval of the WUTC and the
OPUC. Significant estimates are also used in the development of discount rates
and trend rates  related to the measurement of retirement benefit obligations
and accrual amounts, and in the determination of depreciable lives of utility
plant.


                                       30

<PAGE>

NOTE 3 - UTILITY PLANT

Utility plant consists of the following components:

                                  SEPTEMBER 30     DECEMBER 31
(DOLLARS IN THOUSANDS)                1996            1995
-------------------------------------------------------------

 Distribution plant                $  332,094      $ 311,624
 Transmission plant                    14,086         14,086
 Production plant                       1,053          1,053
 General plant                         30,999         30,622
 Intangible plant                         212            212
 Nondepreciable plant                   5,327          5,327
                                  ------------   ------------
                                   $  383,771     $  362,924


NOTE 4 - REDEEMABLE PREFERRED STOCKS
<TABLE>
<CAPTION>

                                             SEPTEMBER 30, 1996          DECEMBER 31, 1995        DECEMBER 31, 1994
 (DOLLARS IN THOUSANDS)                      SHARES        AMOUNT      SHARES       AMOUNT       SHARES       AMOUNT
----------------------------------------------------------------------------------------------------------------------

<S>                                           <C>        <C>          <C>          <C>           <C>         <C>
7.85% cumulative, $1.00 par value             60,000     $  6,000       60,000     $  6,000       60,000     $  6,000
$.55 cumulative senior, series A, B,
     and C, without par value:
          Beginning of year                   96,560          851      135,427        1,217      167,676        1,528
          Retirements                              -            -       38,867          366       32,249          311
                                          ----------------------------------------------------------------------------
Authorized, issued, and outstanding
     at end of year                          156,560     $  6,851      156,560     $  6,851      195,427     $  7,217
</TABLE>


Senior preferred stock is subject to mandatory redemption as follows:

  (DOLLARS IN THOUSANDS)             SHARES                   AMOUNT
---------------------------------------------------------------------

      1997                           24,810                   $  248
      1998                           25,000                   $  250
      1999                           25,000                   $  250
      2000                           14,500                   $  145
      2001                            7,250                   $   73

The shares may be purchased on the open market, or redeemed at $10 per share
plus accrued dividends.  Redemption in excess of the required number of shares
of preferred stock can be made only if all cumulative dividends on preferred
stock have been paid.  The 7.85% cumulative preferred stock may not be redeemed
until maturity on November 1, 1999.


                                       31

<PAGE>

NOTE 5 - COMMON STOCK

At September 30, 1996, shares of common stock are reserved for issuance as
follows:
<TABLE>
<CAPTION>

                                   NUMBER OF SHARES    PURCHASE OR CONTRIBUTION PRICE PER SHARE
--------------------------------------------------------------------------------------------------------------

<S>                                     <C>            <C>
Employee Savings Plan and
  Retirement Trust (401(k) plan)           197,051     Market closing price of common stock immediately
                                                       prior to purchase by the trustee.
Dividend reinvestment plan                 228,875     Average of high and low sales prices on the closest
                                                       business day immediately preceding the investment
                                                       date, which is the 15th day of each month.
Director stock award plan                    7,800     Market closing price of common stock on the day
                                                       of the Company's annual meeting.
                                          ---------
                                           433,726
</TABLE>


In August 1996, the Company issued an additional 1,487,700 shares of common
stock at a price to the public of  $15.25 per share, resulting in net proceeds
of $21,596,000.



NOTE 6 - NOTES PAYABLE

The Company's short-term borrowing needs are met with a $40,000,000 five year
revolving credit agreement with three of its banks.  The annual commitment fee
is 1/8 of 1% and  the committed lines of credit also support a money market
facility and a commercial paper facility of a similar amount.  The  Company also
has  $25,000,000 of uncommitted lines from three banks.  A subsidiary company
has a $5,000,000 revolving credit facility used for non-regulated business, and
at September 30, 1996, $1,850,000 was outstanding for a fixed term of five
years.

<TABLE>
<CAPTION>

                                                 SEPTEMBER 30         DECEMBER 31         DECEMBER 31
(DOLLARS IN THOUSANDS)                               1996                1995                1994
-----------------------------------------------------------------------------------------------------
<S>                                                <C>                 <C>                 <C>
Amount outstanding                                 $       -           $  32,000           $  14,501
Average daily balance outstanding                     15,664              13,170              15,217
Average interest rate, excluding commitment fee        5.77%               6.29%               4.87%
Maximum month end amount outstanding                  27,500              32,000              23,941
</TABLE>


                                       32

<PAGE>


NOTE 7 - LONG-TERM DEBT

Long -term debt consists of the following:

                                                SEPTEMBER 30    DECEMBER 31
(DOLLARS IN THOUSANDS)                             1996            1995
--------------------------------------------------------------------------------

6.53% Five Year Term Note                              1,850          2,100
     due 2000

Medium-term notes:
     5.77% due 1998                                    5,000          5,000
     5.78% due 1998                                    5,000          5,000
     7.18% due 2004                                    4,000          4,000
     7.32% due 2004                                   22,000         22,000
     8.38% due 2005                                    5,000          5,000
     8.35% due 2005                                    5,000          5,000
     8.50% due 2006                                    8,000          8,000
     8.06% due 2012                                   14,000         14,000
     8.10% due 2012                                    5,000          5,000
     8.11% due 2012                                    3,000          3,000
     7.95% due 2013                                    4,000          4,000
     8.01% due 2013                                   10,000         10,000
     7.95% due 2013                                   10,000         10,000
                                                    --------       --------
                                                    $101,850       $102,100


None of the long-term debt includes sinking fund requirements.  Various debt and
credit agreements restrict the Company and its subsidiaries as to indebtedness,
payment of cash dividends on common stock, and other matters.  Under these
restrictions, approximately $25,995,000 is available for payment of dividends as
of  September 30, 1996. Long-term debt matures as follows:  $10,000,000 in 1998,
none in 1999, $1,850,000 in 2000, none in 2001, and $90,000,000 thereafter.
There are no current maturities.

NOTE 8 - INCOME TAXES

Under the provisions of SFAS No. 109, the Company was required to record a
deferred tax liability for the cumulative tax effect of basis differences on
utility plant placed in service prior to 1981.  Flow through accounting had
previously been recorded with respect to these temporary differences.  In
addition, the Company was required to adjust previously recorded deferred tax
liabilities related to plant placed in service after 1980, due to reductions in
tax rates.  Due to regulatory policies regarding recovery of deferred taxes
charged to customers through rates, a regulatory liability was recorded which
offsets the effect of these adjustments to the deferred tax balances.  Therefore
these adjustments had no effect on net earnings.  The provision for income tax
expense consists of the following:

                             NINE MONTHS ENDED         YEAR ENDED
                                 SEPTEMBER 30    DECEMBER 31    DECEMBER 31
(DOLLARS IN THOUSANDS)               1996           1995            1994
--------------------------------------------------------------------------------

Current tax expense                    $1,108         $2,661         $2,120
Deferred tax expense                      673          2,112          1,660
Amortization of deferred
     investment tax credits              (175)          (265)          (275)
                                      -------------------------------------
                                       $1,606         $4,508         $3,505


                                       33
<PAGE>

A reconciliation between income taxes calculated at the statutory federal tax
rate and income taxes reflected in the financial statements is as follows:

<TABLE>
<CAPTION>

                                                                     NINE MONTHS ENDED                 YEAR ENDED
                                                                         SEPTEMBER 30         DECEMBER 31         DECEMBER 31
(DOLLARS IN THOUSANDS)                                                       1996                1995                 1994
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                     <C>                 <C>

Statutory federal income tax rate                                                  34%                 35%                 35%
Income tax calculated at statutory federal rate                              $  1,570            $  4,284            $  3,243
Increase (decrease) resulting from:
     State income tax, net of federal tax benefit                                  34                  86                  80
     Differences between book and tax depreciation                                251                 339                 468
     Amortization of investment tax credits                                      (175)               (265)               (275)
     Other                                                                        (74)                 64                 (11)
                                                                             -------------------------------------------------
                                                                             $  1,606            $  4,508            $  3,505
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  The tax effects of
significant items comprising the Company's net deferred tax liability are as
follows:

                                                SEPTEMBER 30    DECEMBER 31
(DOLLARS IN THOUSANDS)                             1996            1995
--------------------------------------------------------------------------------
Deferred tax liabilities:
     Differences between book and tax basis
      of property                                  $  14,173      $  13,910
     Debt refinancing costs                            2,175          2,315
     Retirement benefit obligations                    1,066          1,359
     Other                                                 -              1
                                                   ------------------------
                                                      17,414         17,585
Deferred tax assets:
     Valuation reserves                                  363            313
     Retirement benefit obligations                      420            434
     Provision for doubtful accounts                     179            173
     Other                                               268            204
                                                   ------------------------
                                                       1,230          1,124
                                                  ------------------------
Net deferred tax liability                         $  16,184      $  16,461


NOTE 9 - RETIREMENT PLANS

The Company's noncontributory defined benefit pension plan covers substantially
all employees over 21 years of age with one year of service.  The benefits are
based on a formula which includes credited years of service and the employee's
annual compensation.  The Company's policy is generally to fund the plan to the
extent allowable under Internal Revenue Service rules.

The Company provides executive officers with supplemental retirement, death, and
disability benefits.  Under the plan, vesting occurs when the executive reaches
age 55 and has completed five years of participation under the plan, upon death,
or change of control.  The plan supplements the benefit received through Social
Security and the defined benefit pension plan so that the total retirement
benefits equal  70% of the executive's highest salary during any of the five
years preceding retirement.   The plan also provides a death benefit equivalent
to ten years of vested benefits.  The Company funds the plan by making
contributions to the Trust sufficient to assure assets held by the Trust always
exceed the accumulated benefit obligation for benefits payable by the plan.


                                       34
<PAGE>

The funded status of the defined benefit pension and supplemental retirement
plans and amounts recognized in the Company's  financial statements are shown as
follows:

<TABLE>
<CAPTION>

                                                                           PENSION PLAN          SUPPLEMENTAL RETIREMENT PLAN
                                                                    SEPTEMBER 30    DECEMBER 31   SEPTEMBER 30    DECEMBER 31
(DOLLARS IN THOUSANDS)                                                  1996           1995           1996           1995
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>          <C>             <C>

Actuarial present value of accumulated benefit obligations:
     Vested                                                             $ 21,960       $ 21,863        $ 2,875        $ 3,141
     Nonvested                                                               208            195            219            199
                                                                        -----------------------------------------------------
                                                                        $ 22,168       $ 22,058        $ 3,094        $ 3,340
                                                                        -----------------------------------------------------
Projected benefit obligation for services rendered to date              $(25,837)      $(26,618)       $(3,636)       $(3,813)
Plan assets, at fair value, primarily common stocks,
     corporate bonds, and life insurance policies                         21,432         19,376          4,131          3,430
                                                                        -----------------------------------------------------
Projected benefit obligation in excess of plan assets                     (4,405)        (7,242)           495           (383)
Unrecognized amounts:
     Prior service cost                                                    3,464          3,754           (257)          (284)
     Loss (gain) from past experience different from that assumed            871          4,689            704            949
     Net transition obligation                                                18             22          1,028          1,103
Adjustment to recognize minimum liability                                   (684)        (3,777)             -              -
                                                                        -----------------------------------------------------
Prepaid (accrued) pension cost                                          $   (736)      $ (2,554)       $ 1,970        $ 1,385

</TABLE>


Net pension cost for both plans included the following components:

<TABLE>
<CAPTION>

                                                                      NINE MONTHS ENDED                 YEAR ENDED
                                                                         SEPTEMBER 30         DECEMBER 31         DECEMBER 31
(DOLLARS IN THOUSANDS)                                                       1996                1995                 1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                  <C>                 <C>

Service cost of benefits earned during the period                            $  1,095            $  1,171            $  1,271
Interest cost on projected benefit obligation                                   1,684               1,936               2,044
Actual return on plan assets                                                   (2,274)             (4,057)             (1,101)
Deferral of unrecognized loss (gain) and amortization, net                      1,179               2,916                (524)
Amount recognized due to settlement                                                 -                   -                  16
                                                                             -------------------------------------------------
                                                                             $  1,684            $  1,966            $  1,706

</TABLE>

The following table sets forth the approximate effects on the projected benefit
obligations resulting from amendments to the pension plan and from the change in
the discount rate from 7.25% to 8.25% in 1996 and from 8.75% to 7.25% in 1995.

                                                             SUPPLEMENTAL
                                          PENSION PLAN      RETIREMENT PLAN
(DOLLARS IN THOUSANDS)                   1996      1995      1996      1995
---------------------------------------------------------------------------

Effect of change in discount rate     $(2,970) $  4,500   $  (190)   $  700
Effect of admendment to pension plan      N/A     1,800       N/A      (300)


                                       35
<PAGE>

The following assumptions were used to determine the projected benefit
obligation and expected return on assets at:


                                            SEPTEMBER 30 DECEMBER 31 DECEMBER 31
(DOLLARS IN THOUSANDS)                          1996        1995        1994
--------------------------------------------------------------------------------
Pension plan:

     Discount rate                              8.25%       7.25%       8.75%
     Long-term rate of return on plan
      assets                                    9.00%       9.00%       8.50%
     Rate of increase in future
      compensation levels                       5.00%       5.00%       5.00%
Supplemental retirement plan:
     Discount rate                              8.25%       7.25%       8.75%
     Long-term rate of return on plan
      assets                                    8.50%       8.50%       8.50%
     Rate of increase in future
      compensation levels                       5.00%       5.00%       5.00%



The Company has an Employee Savings Plan and Retirement Trust (401(k) plan).
All employees 21 years of age or older with one full year of service are
eligible to enroll in the 401(k) plan.  Under the terms of the 401(k) plan, the
Company will match each employee's contribution to the 401(k) plan at a rate of
50% of the employee's contribution up to 6% of the employee's compensation, as
defined.  Beginning January 1, 1997, the matching rate will increase to 75% with
the increased contribution in the form of Company stock.  The Company recognized
costs for contributions to this plan of $377,000, $458,000, and $474,000 for
1996, 1995 and 1994, respectively.

The Company's health care plan provides Postretirement Benefits Other than
Pensions (PBOP), consisting of medical and prescription drug benefits, to its
retired employees hired prior to June 1, 1992, and their eligible dependents.
The Company has been recording PBOP expense, as provided in SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions", since
January 1, 1993. The Company deferred the portion of the annual PBOP accrual
attributable to Washington regulated operations in excess of the cash basis of
recording these expenses through July 31, 1996. The amounts so deferred have
been $767,000, $1,028,000, and $1,892,000 in 1996, 1995, and 1994 respectively.
On August 1, 1996 new customer tariff rates were approved by the WUTC in the
general rate case. Accordingly, the PBOP deferrals ceased and the balance is
being amortized concurrently with the new rates.


Amounts accrued for PBOP, not including the above mentioned deferrals, consist
of the following components:

<TABLE>
<CAPTION>

                                                                      NINE MONTHS ENDED                 YEAR ENDED
                                                                         SEPTEMBER 30         DECEMBER 31         DECEMBER 31
(DOLLARS IN THOUSANDS)                                                       1996                1995                 1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                  <C>                 <C>

Service cost                                                                 $    326            $    366            $    523
Net interest cost                                                                 939               1,114                1151
Actual return on plan assets                                                     (317)               (627)                 12
Net amortization and deferral                                                     492                 934                 551
                                                                             ------------------------------------------------
                                                                             $  1,440            $  1,787            $  2,237

</TABLE>

                                       36
<PAGE>

The Company's policy is generally to fund the plan to the extent allowable under
Internal Revenue Service rules.  The following table sets forth the health care
plan's funded status.


                                                     SEPTEMBER 30  DECEMBER 31
(DOLLARS IN THOUSANDS)                                    1996         1995
------------------------------------------------------------------------------

Accumulated postretirement
  benefit obligation (APBO):
     Retirees                                            $  4,811     $  4,058
     Fully eligible active plan participants                5,416        5,948
     Other active plan participants                         5,796        7,168
                                                         ----------------------
                                                           16,023       17,174

Plan assets, at fair value, primarily common
  stocks and corporate bonds                                5,376        4,194
                                                         ----------------------
Funded status                                             (10,647)     (12,980)
Unrecognized transition obligation                         10,676       11,169
Unrecognized (gain) loss                                   (1,678)         349
                                                         ----------------------
Accrued postretirement benefit cost                      $ (1,649)    $ (1,462)


The assumed health care cost trend rate used in measuring the APBO is 9.5% for
1997, trending down to 5.5% at 2005.  At January 1, 1996, the census and per
capita claims cost assumptions were updated, resulting in a reduction in the
APBO of approximately $300,000.  The assumed discount rate used in determining
the APBO was 8.25% at September 30, 1996, and 7.25% at December 31, 1995.  The
effect of the increase in the discount rate was a decrease of approximately $2.3
million in the APBO at September  30, 1996.  A one percentage point increase in
the assumed health care cost trend rate for each year would increase the APBO by
approximately 15.6% and the service and interest cost components of net
postretirement health care cost by approximately 17.4%.

NOTE 10 - GAS SERVICE CONTRACTS

The Company has entered into various transportation, supply, storage, and
peaking service contracts to assure that adequate supplies of gas will be
available to provide firm service to its core customers and to meet its
obligations under long-term non-core customer agreements.  These contracts,
which have maturities ranging from one to 30 years, provide that the Company
must pay a fixed demand charge each month.

One gas supply contract requires the Company to take 32,850,000 therms annually
or the Company will incur a penalty charge on therms not taken below that
amount. This contract's primary term ends October 31, 1998. Another contract has
a 42% annual take requirement, equaling an obligation of 41,475,315 therms per
year through 2004.  Among the Company's  other multi-year agreements is  a  15-
year contract for winter-only ( October through March) supply  that  has a 70%
minimum take requirement, which equates to a purchase requirement of 9,841,650
therms per year.

The remaining gas supply contracts do not require the Company to take any gas,
but the various suppliers are obligated to provide up to a maximum of 4,380,000
therms annually.


                                       37
<PAGE>

The Company's minimum obligations under these contracts are set forth in the
following table. The amounts are based on current contract price terms and
estimated commodity prices, which are subject to change.

<TABLE>
<CAPTION>

                                                                            INTERSTATE
                                                           FIRM           TRANSPORTATION        STORAGE AND             TOTAL
(DOLLARS IN THOUSANDS)                                  GAS SUPPLY            CHARGES         PEAKING SERVICE
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>                <C>                   <C>

Fiscal Years:
1997                                                    $  15,805           $  27,924            $  5,029           $  48,758
1998                                                       15,376              28,045               4,897              48,318
1999                                                       13,240              27,862               4,079              45,181
2000                                                       12,801              27,826               3,890              44,517
2001                                                       11,091              27,826               3,890              42,807
Thereafter                                                 40,629             341,350              49,982             431,961
                                                        ---------------------------------------------------------------------
                                                        $ 108,942           $ 480,833            $ 71,767           $ 661,542

</TABLE>


Purchases under these contracts for 1994, 1995, and 1996, including commodity
purchases, as well as demand charges have been as follows:


<TABLE>
<CAPTION>

                                                                            INTERSTATE
                                                           FIRM           TRANSPORTATION        STORAGE AND             TOTAL
(DOLLARS IN THOUSANDS)                                  GAS SUPPLY            CHARGES         PEAKING SERVICE
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>                <C>                     <C>

1994                                                    $  54,695             $22,751            $  4,639             $82,085
1995                                                    $  45,223             $28,548            $  4,722             $78,493
1996 (nine months)                                      $  32,075             $19,002            $  3,718             $54,795

</TABLE>

NOTE 11- CONTINGENCIES

The Company was notified by the Department of Ecology of the State of Washington
that it is a "potentially liable person" as a result of contamination in the
area of the Company's underground storage tanks at its Sunnyside, Washington
office.  The Company has provided $455,000 to date for the estimated costs of
the cleanup.  The Company believes that the remaining reserves of $72,000 are
adequate to complete the remediation.

During the first quarter of 1995, a claim related to environmental contamination
from a manufactured gas plant site in Oregon previously operated by a
predecessor corporation of the Company was filed by the present property owner.
The claim requested that the Company assume responsibility for investigation and
possible cleanup of alleged contamination on the property.  A consultant has
been retained by the property owner to evaluate the nature and extent of any
contamination.  To date the consultant has reported that contamination
consistent with manufactured gas operations is present, but there is no estimate
of possible costs of remediation.  To the extent the Company may be responsible
for all or part of such cost, it expects to seek contribution from other site
owners and its insurers, and would seek appropriate rate relief to the extent of
any remaining expense incurred.

Various lawsuits, claims, and contingent liabilities may arise from time to time
from the conduct of the Company's business.  None of those now pending, in the
opinion of management, is expected to have a material effect on the Company's
financial position, results of operations, or liquidity.

NOTE 12 - REVENUES FROM MAJOR CUSTOMER

In 1996 and 1995, no one customer accounted for more than 10% of  gas revenues.
In 1994, one customer accounted for approximately $20,215,000 in gas revenues.
This represents 10.5% of total 1994 revenues; however, margins derived from this
customer were less than 3% of total margin.  Outstanding accounts receivable
from this customer at December 31, 1994, totaled $2,144,000, which represents
December 1994 consumption.


                                       38
<PAGE>


NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair value amounts have been determined by the Company,
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value.  Accordingly, these estimates are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange.  Thus, the use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.

The estimated fair value amounts of financial instruments are shown as follows:

<TABLE>
<CAPTION>
                                                               SEPTEMBER 30, 1996                      DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)                                CARRYING AMOUNT  ESTIMATED FAIR VALUE   CARRYING AMOUNT   ESTIMATED FAIR VALUE
<S>                                                   <C>              <C>                    <C>               <C>

Assets:
     Cash and cash equivalents                             $  543              $  543            $  2,197            $  2,197
     Notes receivable, including current maturities         2,406               2,423               3,235               3,234
     Accounts receivable                                   11,645              11,645              26,483              26,483
Redeemable Preferred Stock                                  6,851               6,757               6,851               7,324
Liabilities:
     Long-term debt                                       101,850             103,867             102,100             111,615
     Notes Payable                                              -                   -              32,000              32,000

</TABLE>


CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND NOTES PAYABLE:  The carrying
amounts of these items are a reasonable estimate of their fair value.

NOTES RECEIVABLE, REDEEMABLE PREFERRED STOCK, AND LONG-TERM DEBT:  Interest
rates that are currently available to the Company for issuance of instruments
with similar terms and remaining maturities are used to estimate fair value.


NOTE 14 - INTERIM FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>


(DOLLARS IN THOUSANDS                                        QUARTER ENDED                          QUARTER ENDED
EXCEPT PER SHARE DATA)                               9/30/96   6/30/96   3/31/96       12/31/95   9/30/95   6/30/95   3/31/95
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>       <C>       <C>           <C>        <C>       <C>       <C>

Operating revenues                                   $26,584   $33,461   $67,620        $56,907   $26,512   $34,715   $64,610
Gas costs and revenue taxes                           15,082    21,034    41,983         34,892    16,028    21,833    41,585
                                                     -------   -------   -------        -------   -------   -------   -------
Operating margin                                      11,502    12,427    25,637         22,015    10,484    12,882    23,025
Cost of operations                                    12,635    12,374    12,592         11,680    11,475    11,768    11,679
                                                     -------   -------   -------        -------   -------   -------   -------
Earnings from operations                              (1,133)       53    13,045         10,335      (991)    1,114    11,346
Interest and other, net                                2,373     2,524     2,450          2,470     2,425     2,366     2,303
                                                     -------   -------   -------        -------   -------   -------   -------
Earnings before income taxes                          (3,506)   (2,471)   10,595          7,865    (3,416)   (1,252)    9,043
Income taxes                                          (1,504)     (715)    3,825          2,666    (1,099)     (369)    3,310
Preferred dividends                                      131       131       131            131       136       136       136
                                                     -------   -------   -------        -------   -------   -------   -------
Net earnings (loss)                                  ($2,133)  ($1,887)   $6,639         $5,068   ($2,453)  ($1,019)   $5,597
                                                     -------   -------   -------        -------   -------   -------   -------
Earnings (loss) per share                             ($0.22)   ($0.20)    $0.72          $0.56    ($0.27)   ($0.11)    $0.63
                                                     -------   -------   -------        -------   -------   -------   -------
</TABLE>


                                       39

<PAGE>

Note 14 - Interim Financial Information (unaudited) - (continued)

                CONSOLIDATED CONDENSED STATEMENTS OF NET EARNINGS

                                                                    Nine Months
                                                                       Ended
                                                                   Sep. 30, 1995
                                                                   -------------
                  (dollars in thousands except per share data)

  Operating revenues
    Gas sales                                                        $   117,879
    Transportation revenue                                                 7,819
    Other operating income                                                   139
                                                                   -------------
                                                                         125,837
  Less: Gas purchases                                                     71,238
        Revenue taxes                                                      8,208
                                                                   -------------
  Operating margin                                                        46,391
                                                                   -------------
  Cost of operations
    Operating expenses                                                    23,470
    Depreciation and amortization                                          8,273
    Property and payroll taxes                                             3,116
                                                                   -------------
                                                                          34,859
                                                                   -------------

  Earnings from operations                                                11,532
  Less interest and other deductions - net                                 7,157
                                                                   -------------

  Earnings before income taxes                                             4,375
  Income taxes                                                             1,842
                                                                   -------------

  Earnings before preferred dividends                                      2,533
  Preferred dividends                                                        408
                                                                   -------------
  Net earnings                                                       $     2,125
                                                                   -------------
                                                                   -------------
  Common shares outstanding:
    Weighted average                                                       8,977
    End of period                                                          9,098

                                                                   -------------
  Net earnings per common share                                      $      0.24
                                                                   -------------
                                                                   -------------

                                       40
<PAGE>

Note 14 - Interim Financial Information (unaudited) - (continued)

                     CONSOLIDATED CONDENSED BALANCE SHEETS

                                                                   Sep. 30, 1995
                                                                   -------------
                                                                   -------------
                             (dollars in thousands)
                                     ASSETS
 Utility Plant, net after accumulated
   depreciation of $136,248                                        $    221,222
  Construction work in progress                                           5,896
                                                                  -------------
                                                                        227,118
                                                                  -------------
 Other Assets:
   Investments                                                              918
   Notes receivable, less current maturities                              2,335
                                                                  -------------
                                                                          3,253
                                                                  -------------
 Current Assets:
  Cash and cash equivalents                                                 718
  Securities available for sale                                           2,054
  Accounts receivable, less allowance of $409 for doubtful 
    accounts                                                             10,820
  Current maturities of notes receivable                                    868
  Materials, supplies and inventories                                     6,124
  Prepaid expenses and other assets                                       2,689
                                                                  -------------
                                                                         23,273
                                                                  -------------
 Deferred Charges                                                        13,642
                                                                  -------------
                                                                   $    267,286
                                                                  -------------
                                                                  -------------

          COMMON SHAREHOLDERS' EQUITY, PREFERRED STOCKS AND LIABILITIES
 Common Shareholders' Equity:
  Common stock, par value $1 per share, authorized 15,000,000 
    shares
      Issued and outstanding 9,098,133                                 $  9,098
  Additional paid-in capital                                             70,400
  Retained earnings                                                       6,424
                                                                  -------------
                                                                         85,922
                                                                  -------------
 Redeemable Preferred Stocks, aggregate redemption amount of 
   $7,479                                                                 7,200
                                                                  -------------
 Long-term Debt                                                         100,000
                                                                  -------------
 Current Liabilities:
  Notes payable                                                          19,001
  Accounts payable                                                        7,513
  Property, payroll and excise taxes                                      3,004
  Dividends and interest payable                                          6,236
  Other current liabilities                                               2,015
  Current maturities of long-term debt                                    5,000
                                                                  -------------
                                                                         42,769
                                                                  -------------
 Deferred Credits:
  Gas cost changes                                                        5,187
  Other                                                                  26,208
                                                                  -------------
                                                                         31,395
                                                                  -------------
 Commitments and Contingencies                                              -
                                                                  -------------
                                                                   $    267,286
                                                                  -------------

                                       41
<PAGE>


Note 14 - Interim Financial Information (unaudited) - (continued)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                    Nine Months
                                                                       Ended
                             (dollars in thousands)                Sep. 30, 1995
                                                                   -------------

 Operating Activities:
  Net earnings before preferred dividends                           $     2,533
  Adjustments to reconcile net earnings before preferred dividends
   to net cash provided by operating activities:
     Depreciation                                                         8,998
     Amortization of gas cost changes                                     2,520
     Increase in deferred income taxes                                    1,506
     Decrease in deferred investment tax credits                           (180)
     Cash provided (used) by changes in operating assets and
      liabilities:
       Accounts receivable                                               18,063
       Income taxes                                                      (1,716)
       Inventories                                                          169
       Gas cost changes                                                  (1,740)
       Deferred items                                                    (1,793)
       Accounts payable and accrued expenses                             (9,587)
       Prepaid expenses and other assets                                    310
       Other                                                                 (4)
                                                                   -------------
  Net cash provided by operating activities                              19,079
                                                                   -------------
 Investing Activities:
  Capital expenditures                                                  (22,586)
  New consumer loans                                                       (793)
  Receipts on consumer loans                                              1,492
  Purchase of securities available for sale                              (1,813)
  Proceeds from securities available for sale                             1,230
                                                                   -------------
  Net cash used by investing activities                                 (22,470)
                                                                   -------------
 Financing Activities:
   Issuance of common stock, net                                          1,821
   Redemption of preferred stock                                            (17)
   Proceeds from notes payable, net                                       4,500
   Dividends paid                                                        (6,144)
                                                                   -------------
  Net cash provided by financing activities                                 160
                                                                   -------------

 Net Decrease in Cash and Cash Equivalents                               (3,231)

 Cash and Cash Equivalents:
  Beginning of period                                                     3,949
                                                                   -------------
  End of period                                                     $       718
                                                                   -------------


                                       42
<PAGE>


INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE

Cascade Natural Gas Corporation
   and Subsidiaries

We have audited the consolidated financial statements of Cascade Natural Gas
Corporation and subsidiaries as of September 30, 1996, December 31, 1995 and
1994, and for the nine months ended September 30, 1996, and for each of the two
years in the period ended December 31, 1995, and have issued our report thereon
dated November 1, 1996; such consolidated financial statements and report are
included in Part II of this Annual Report on Form 10-K.  Our audits also
included the financial statement schedule of Cascade Natural Gas Corporation,
listed in Item 14(a)2.  This financial statement schedule is the responsibility
of the Company's management.  Our responsibility is to express an opinion based
on our audits.  In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information shown therein.



DELOITTE & TOUCHE LLP


Seattle, Washington
November 1, 1996


                                       43
<PAGE>

                                                                     SCHEDULE II

                CASCADE NATURAL GAS CORPORATION AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
         Column A            Column B             Column C           Column D      Column E
                                          -------------------------
                                                  Additions
                                          -------------------------
                            Balance at     Charged to   Charged to                Balance at
                            Beginning       Costs and     Other     Deductions      End of
        Description         of Period       Expenses     Accounts     (Note)        Period
-------------------------  -------------  ------------  ----------  -----------  -------------
<S>                        <C>            <C>           <C>         <C>          <C>
Allowance for Doubtful
Accounts:

  Year ended:

  December 31, 1994                 $490           340                      369           $461

  December 31, 1995                 $461           330                      366           $425

  September 30, 1996                $425           440                      426           $439

  Note: Accounts receivable written off, net
  of recoveries



Valuation Reserve - Notes
Receivable

  December 31, 1994                   $0           550         577                      $1,127

  December 31, 1995               $1,127           122                                  $1,249

  September 30, 1996              $1,249           288                                  $1,537



Valuation Reserve -
Investments

  December 31, 1994                   $0           150                                    $150

  December 31, 1995                 $150             0                                    $150

  September 30, 1996                $150           154                      304             $0
</TABLE>


                                       44
<PAGE>


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.


     None.


                                       45
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Refer to the information regarding directors under the caption "Election of
Directors" on pages 1 through 3 of the Proxy Statement issued to Shareholders
for the 1997 Annual Meeting (the 1997 Proxy Statement), which information is
incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION.

     Refer to the information regarding executive compensation set forth in the
1997 Proxy Statement, under "Executive Compensation" on pages 7, 8, and 9, and
under "Compensation Committee Interlocks and Insider Participation" on page 9,
which information is incorporated herein by reference. Certain information
concerning the executive officers of the Company is set forth in Part I, under
the caption "Executive Officers of the Registrant."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Refer to the information regarding security ownership of certain beneficial
owners and management under the caption "Security Ownership of Certain
Beneficial Owners and Management" on page 4 of the 1997 Proxy Statement, which
information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Refer to the information regarding certain relationships and transactions
under the caption "Compensation Committee Interlocks and Insider Participation"
on page 9 of the 1997 Proxy Statement, which information is incorporated herein
by reference.


                                       46
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  1. Financial Statements (Included in Part II of this report):

     Independent Auditors' Report
     Consolidated Statements of Net Earnings for the Nine Months Ended September
          30, 1996, and the Years Ended December 31, 1995, and 1994
     Consolidated Balance Sheets, September 30, 1996, and December 31, 1995
     Consolidated Statements of Common Shareholders' Equity for the Nine Months
          Ended September 30, 1996, and Years Ended December 31, 1995, and 1994
     Consolidated Statements of Cash Flows for the Nine Months Ended September
          30, 1996, and the Years Ended December 31, 1995, and 1994
     Notes to Consolidated Financial Statements

(a) 2. Financial Statement Schedules (Included in Part II of this report):

     Independent Auditors' Report on Financial Statement Schedule
     Schedule II - Valuation and Qualifying Accounts

(a) 3. Exhibits:

     Refer to the index to exhibits following the signature page of this report.
     Each management contract or compensatory plan or arrangement required to be
     filed as an exhibit to this report is identified in the list.

(b) Reports on Form 8-K:

     On July 19, 1996, the registrant filed a report on Form 8-K, dated July 18,
1996, to include as exhibits an updated description of the registrant's common
stock and related preferred stock purchase rights and the registrant's restated
articles of incorporation and restated bylaws as recently amended.


                                       47
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                   CASCADE NATURAL GAS CORPORATION

     December 20, 1996                  By   /s/  J. D. Wessling
---------------------------                 --------------------
          Date                          J. D. Wessling
                                        Vice President - Finance, Chief
                                        Financial Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

                               Chairman of the Board,
                               Chief Executive Officer
/s/  W. Brian Matsuyama        and Director                    December 20, 1996
---------------------------    (Principal Executive Officer)   -----------------
     W. Brian Matsuyama                                              Date

                               President and
/s/  Ralph E. Boyd             Chief Operating Officer         December 20, 1996
---------------------------                                    -----------------
     Ralph E. Boyd                                                   Date
                               Vice President - Finance,
/s/  J. D. Wessling            Chief Financial Officer         December 20, 1996
---------------------------    (Principal Financial Officer)   -----------------
     J. D. Wessling                                                  Date

                               Treasurer and Chief
 /s/ James E. Haug             Accounting Officer              December 20, 1996
---------------------------    (Principal Accounting Officer)  -----------------
     James E. Haug                                                   Date

 /s/ Carl Burnham, Jr.         Director                        December 20, 1996
---------------------------                                    -----------------
     Carl Burnham, Jr.                                               Date

 /s/ Melvin C. Clapp           Director                        December 20, 1996
---------------------------                                    -----------------
     Melvin C. Clapp                                                 Date

 /s/ Thomas E. Cronin          Director                        December 20, 1996
---------------------------                                    -----------------
     Thomas E. Cronin                                                Date

 /s/ David A. Ederer           Director                        December 20, 1996
---------------------------                                    -----------------
     David A. Ederer                                                 Date

 /s/ Howard L. Hubbard         Director                        December 20, 1996
---------------------------                                    -----------------
     Howard L. Hubbard                                               Date

 /s/ Larry L. Pinnt            Director                        December 20, 1996
---------------------------                                    -----------------
     Larry L. Pinnt                                                  Date

 /s/ Brooks G. Ragen           Director                        December 20, 1996
---------------------------                                    -----------------
     Brooks G. Ragen                                                 Date

 /s/ Mary A. Williams          Director                        December 20, 1996
---------------------------                                    -----------------
     Mary A. Williams                                                Date


                                       48
<PAGE>

INDEX TO EXHIBITS

EXHIBIT
NO.                                DESCRIPTION
---                                -----------

3.1     Restated Articles of Incorporation of the Registrant as amended through
        March 28, 1996.  Incorporated by reference to Exhibit 3.1 to the
        Registrant's current report on Form 8-K dated July 18, 1996.

3.2     Restated Bylaws of the Registrant.  Incorporated by reference to Exhibit
        3.2 to the Registrant's current report on Form 8-K dated July 18, 1996.

4.1     Indenture dated as of August 1, 1992, between the Registrant and The
        Bank of New York relating to Medium-Term Notes.  Incorporated by
        reference to Exhibit 4 to the Registrant's current report on Form 8-K
        dated August 12, 1992.

4.2     First Supplemental Indenture dated as of October 25, 1993, between the
        Registrant and The Bank of New York relating to Medium-Term Notes.
        Incorporated by reference to Exhibit 4 to the Registrant's quarterly
        report on Form 10-Q for the quarter ended June 30, 1993.

4.3     Rights Agreement dated as of March 19, 1993, between the Registrant and
        Harris Trust and Savings Bank.  Incorporated by reference to Exhibit 2
        to the Registrant's registration statement on Form 8-A dated April 21,
        1993.

4.4     First Amendment to Rights Agreement dated June 15, 1993, between the
        Registrant and The Bank of New York. Incorporated by reference to
        Exhibit 4 to the Registrant's quarterly report on Form 10-Q for the
        quarter ended June 30, 1993.

10.1    Letter Agreement dated April 28, 1995 between CanWest Gas Supply U.S.A.,
        Inc. and the Registrant for Winter Peaking Supply - 1995 through 1998.
        Incorporated by reference to Exhibit 10.1 to the Registrant's Annual
        Report on Form 10-K for the year ended December 31, 1995.

10.2    Service Agreement (Storage Gas Service under Rate Schedule SGS-1) dated
        January 12, 1994, between Northwest Pipeline Corporation and the
        Registrant. Incorporated by reference to Exhibit 10.2 to the
        Registrant's Annual Report on Form 10-K for the year ended December 31,
        1993 (1993 Form 10-K).

10.3    Service agreement (assigned Storage Gas Service under Rate Schedule
        SGS-1) dated January 12, 1994, between Northwest Pipeline Corporation
        and the Registrant.  Incorporated by reference to Exhibit 10.3 to the
        Registrant's 1993 Form 10-K.

10.4    Service Agreement (Liquefaction -- Storage Gas Service under Rate
        Schedule SGS-1) dated January 12,1994, between Northwest Pipeline
        Corporation and the Registrant.  Incorporated by reference to Exhibit
        10.4 to the Registrant's 1993 Form 10-K.

10.5    Gas Purchase Agreement dated November 1, 1990, between Mobil Oil Canada
        and the Registrant. Incorporated by reference to Exhibit 10-6 to the
        1991 Form 10-K.

10.6    Amendment to Gas Purchase Agreement dated August 30, 1991, between Mobil
        Oil Canada and the Registrant. Incorporated by reference to Exhibit
        10(h)(2) to the Registrant's registration statement on Form S-2, No. 
        33-52672 (the 1992 Form S-2).

10.7    Amendment dated October 29, 1996 to Natural Gas Sales Agreement dated
        November 1, 1990, between Canadian Hydrocarbons Marketing, Inc., and the
        Registrant. A PORTION OF THIS AGREEMENT IS SUBJECT TO A REQUEST FOR
        CONFIDENTIAL TREATMENT.


                                       49
<PAGE>


10.9    Long Term Gas Sales Agreement dated August 26, 1993, between Canadian
        Hydrocarbons Marketing Inc., and the Registrant. Incorporated by
        reference to Exhibit 10.2 to amendment no. 1 to the Registrant's
        quarterly report on Form 10-Q/A for the quarter ended September 30,
        1993.

10.10   Gas Sale Agreement dated November 1, 1993, between Mobil Natural Gas
        Inc. and the Registrant. Incorporated by reference to Exhibit 10.10 to
        the Registrant's 1993 Form 10-K.

10.11   Agreement for Sale and Purchase of Gas dated November 1, 1993, as
        amended by Letter Amendment dated December 8, 1993, between Mobil
        Natural Gas, Inc., and the Registrant. Incorporated by reference to
        Exhibit 10.11 to the Registrant's 1993 Form 10-K.

10.12   Replacement Firm Transportation Agreement dated July 31, 1991, between
        Northwest Pipeline Corporation and the Registrant. Incorporated by
        reference to Exhibit 10(1) to the 1992 Form S-2.

10.12.1 Amendments dated August 20, 1992, November 1, 1992, October 20, 1993,
        and December 17, 1993, to Replacement Firm Transportation Agreement
        dated July 31, 1991, between Northwest Pipeline Corporation and the
        Registrant. Incorporated by reference to Exhibit 10.12.1 to the
        Registrant's 1993 Form 10-K.

10.13   Firm Transportation Service Agreement dated April 25, 1991, between
        Pacific Gas Transmission Company and the Registrant (1993 expansion).
        Incorporated by reference to Exhibit 10(m) to the 1992 Form S-2.

10.14   Firm Transportation Service Agreement dated October 27, 1993, between
        Pacific Gas Transmission Company and the Registrant.  Incorporated by
        reference to Exhibit 10.14 to the Registrant's 1993 Form 10-K.

10.17   Storage Agreement dated July 23, 1990, between Washington Water Power
        Company and the Registrant.  Incorporated by reference to Exhibit 10(v)
        to the 1992 Form S-2.

10.17.1 Letter agreement dated May 26, 1995, amending the Storage Agreement
        dated July 23, 1990, between Washington Water Power Company and the
        Registrant. Incorporated by reference to Exhibit 10.17.1 to the
        Registrant's Annual Report on Form 10-K for the year ended
        December 31, 1995.

10.18   Service Agreement (Firm Redelivery Transportation Agreement under Rate
        Schedule TF-2 for Cascade's SGS-1) dated January 12, 1994, between
        Northwest Pipeline Corporation and the Registrant. Incorporated by
        reference to Exhibit 10.18 to the Registrant's Annual Report on Form 
        10-K for the year ended December 31, 1994.

10.19   Service Agreement (Firm Redelivery Transportation Agreement under Rate
        Schedule TF-2 for Cascade's assignment of SGS-1 from WWP) dated January
        12, 1994, between Northwest Pipeline Corporation and the Registrant.
        Incorporated by reference to Exhibit 10.19 to the Registrant's Annual
        Report on Form 10-K for the year ended December 31, 1994.

10.20   Service Agreement (Firm Redelivery Transportation Agreement under rate
        Schedule TF-2 for Cascade's LS-1) dated January 12, 1994, between
        Northwest Pipeline Corporation and the Registrant. Incorporated by
        reference to Exhibit 10.20 to the Registrant's Annual Report on  Form
        10-K for the year ended December 31, 1994.

10.21   Gas Purchase Contract dated October 1, 1994, between IGI Resources, Inc.
        and the Registrant. Incorporated by reference to Exhibit 10.21 to the
        Registrant's Annual Report on Form 10-K for the year ended December 31,
        1994.


                                       50
<PAGE>


10.22   Amended and restated Natural Gas Sales Agreement dated August 17, 1994,
        between Westcoast Gas Services, Inc. and Registrant which replaces and
        substitutes for the Kingsgate Gas Sales Agreement dated September 23,
        1960. Incorporated by reference to Exhibit 10.22 to the  Registrant's
        Annual Report on Form 10-K for the year ended December 31, 1994.

10.23   Firm Transportation Service Agreement dated November 4, 1994, between
        Pacific Gas Transmission and the Registrant, effective November 1, 1995.
        Incorporated by reference to Exhibit 10.23 to the Registrant's Annual
        Report on Form 10-K for the year ended December 31, 1994.

10.24   Firm Transportation Agreement dated August 1, 1994, between Northwest
        Pipeline Corporation and Registrant. Incorporated by reference to
        Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the
        year ended December 31, 1994.

10.25   Prearranged Permanent Capacity Release of Firm Natural Gas
        Transportation Agreements dated November 30, 1993 between Tenaska Gas
        Co., Tenaska Washington Partners, L.P. and Registrant. Incorporated by
        reference to Exhibit 10.25 to the Registrant's Annual Report on Form 
        10-K for the year ended December 31, 1994.

10.26   Agreement for Peak Gas Supply Service dated August 1, 1992, between
        Tenaska Gas Co., Tenaska Washington Partners, L.P., and Registrant.
        Incorporated by reference to Exhibit 10.26 to the Registrant's Annual
        Report on Form 10-K for the year ended December 31, 1994.

10.27   Agreement for Peaking Gas Supply Service dated November 22, 1991,
        between Longview Fibre Company and Registrant. Incorporated by reference
        to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the
        year ended December 31, 1994.

10.28   Letter Agreement dated October 24, 1995 between Westcoast Gas Services,
        Inc. and the Registrant for Winter Peaking Supply - 1995 through 1998.
        Incorporated by reference to Exhibit 10.28 to the Registrant's Annual
        Report on Form 10-K for the year ended December 31, 1995.

10.29   1991 Director Stock Award Plan of the Registrant.*  Incorporated by
        reference to Exhibit 10(n) to the 1992 Form S-2.

10.30   Executive Supplemental Income Retirement Plan of the Registrant and
        Supplemental Benefit Trust as amended and restated as of May 1, 1989, as
        amended by Amendment No. 1 dated July 1, 1991.*  Incorporated by
        reference to Exhibit 10(o) to the 1992 Form S-2.

10.31   Employment agreement between the Registrant and W. Brian Matsuyama.*
        Incorporated by reference to Exhibit 10(p) to the 1992 Form S-2.

10.32   Employment agreement between the Registrant and Jon T. Stoltz.*
        Incorporated by reference to Exhibit 10(q) to the 1992 Form S-2.

12.     Statement regarding computation of ratio of earnings to fixed charges
        and preferred dividend requirements.

21.     A list of the Registrant's subsidiaries is omitted because the
        subsidiaries considered in the aggregate as a single subsidiary do not
        constitute a significant subsidiary.

23.     Consent of Deloitte & Touche LLP to the incorporation of their report in
        the Registrant's registration statements.

27.     Financial Data Schedule.
------------------------
* Management contract or compensatory plan or arrangement.


                                       51